l|{|liai!l!J|lii!l!!tlltlllll(llt|ltlI}tlll!(t!!lI!tf!lt!l!{!!lllltP^^^ 

mu»uii.ui,.*iiMj||jj|j|j|!{|jij|!tjfi}||if|ni|!(jlf|H^ 


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UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


SELECTIONS   AND    DOCUMENTS 
IN    ECONOMICS 


EDITED    BY 

WILLIAM    Z.  RIPLEY,  Ph.D. 

Professor  of  Economics,  Harvard  University 


SELECTIONS  AND  DOCUMENTS 
IN  ECONOMICS 

TRUSTS,  POOLS  AND  CORPORATIONS 
(Re-vised  Edition) 

By  William   Z.   Ripley,    Ph.D  ,   Professor  of 
Economics,  Harvard  University 

TRADE   UNIONISM  AND  LABOR 
PROBLEMS 

By  John  R.  Commons,  Professor  of  Political 
Economy,  University  of  Wisconsin 

SOCIOLOGY  AND  SOCIAL  PROGRESS 

By  Thomas  N.  Carver,  Ph.D.,  Professor  of 
Economics,  Harvard  University 

SELECTED  READINGS  IN  PUBLIC 
FINANCE 

By  Charles  J.    Bullock,    Ph.D.,   Professor  of 
Economics,  Harvard  University 

RAILWAY  PROBLEMS  {Re-vised  Edition) 

By  William   Z.  Ripley,  Ph.D.,   Professor  of 
Economics,  Harvard  University 

SELECTED  READINGS  IN  ECONOMICS 
By  Charles  J.   Bullock,   Ph.D.,    Professor  of 
Economics,  Harvard  University 

ECONOMIC  HISTORY  OF  THE   UNITED 
STATES. 

By  Guy  Stevens  Callender,  Professor  of  Political 
Economy,  Yale  University 

SELECTED  READINGS  IN  RURAL 
ECONOMICS 

By  Thomas   N.  Carver,    Ph.D.,   Professor  of 
Economics,  Harvard   University 


TRUSTS,    POOLS   AND 
CORPORATIONS 


EDITED  WITH  AN   INTRODUCTION 

BY 

WILLIAM  Z.  RIPLEY,  Ph.D. 

in 
NATHANIEL   ROPES    PROFESSOR  OF   ECONOMICS,  HARVARD    UNIVERSITY 


REVISED  EDITION 


GINN  AND  COMPANY 

BOSTON     •     NF.W    YORK     •     CHICAGO      •     LONDON 
ATLANTA     •     DALLAS     •     COLUMRUS     •     SAN    FRANCISCO 


T 


COPYRIGHT,  1905,  1916,  BY 
WILLIAM  Z.  RIPLEY 


ALL    RIGHTS    RESERVED 
216.2 


tgfte   gtjienamm   gregg 

GINN   AM)   C(JM1'ANY  •  PRO- 
PKlliTORS  •  IIOSTON  •  U.S.A. 


PREFACE 

IN  THE  preface  to  the  first  edition  of  this  collection  of  re- 
prints in  1905  the  distinction  between  its  purpose  and  that 
of  such  predecessors  as  Dunbar's  "  Laws  Relating  to  Currency, 
Finance  and  Banking"  and  Rand's  "Economic  History"  was 
pointed  out.  This  volume,  according  to  its  announcement,  was 
intended  for  use  especially  as  a  textbook  rather  than  for  handy 
reference  or  as  a  collection  of  original  documents.  Similarly,  it 
is  hoped,  this  present  enlarged  edition  is  in  no  sense  a  rival,  but 
rather  complementary  to  such  recent  volumes  as  Stevens'  "  In- 
dustrial Combinations  and  Trusts"  (191 3)  and  Gerstenberg's 
"Materials  of  Corporation  Finance"  (191 5).  Each  of  these 
may  greatly  enrich  instruction  by  affording  a  convenient  store  of 
well-chosen  illustrative  material.  But  this  volume  is  intended  to 
accomplish  something  more.  It  is  a  deliberate  attempt  to  apply 
the  case  system,  so  successfully  evolved  in  the  Harvard  Law 
School,  to  the  study  of  economics.  A  systematic  textbook,  sup- 
plemented by  lectures,  is  expected  to  provide  the  background  so 
essential  to  a  complete  understanding  of  each  selected  case.  But, 
this  being  done,  most  of  these  chapters  purport  to  deal  with  a 
single,  definite,  typical  phase  of  the  general  subject  of  industrial 
combination. 

The  primary  motive  is  to  further  the  interests  of  sound  eco- 
nomic teaching,  with  especial  reference  to  the  study  of  concrete 
problems  of  great  public  and  private  interest.  A  difficulty  in  the 
substitution  of  present-day  social  and  economic  studies  for  the 
good  old-fashioned,  linguistic  ones,  or  for  the  modern  sciences, 
—  a  difficulty  especially  peculiar  to  descriptive  economics  as  dif- 
ferentiated from  economic  theory,  —  has  always  been  to  secure 
data  sufficiently  concrete,  definite  and  convenient  to  form  a  basis 
for  analysis,  discussion  and  criticism.    The  lecture  system  has  its 


VI  TRUSTS,  POOLS  AND  CORPORATIONS 

advantages  in  stimulating  interest  and,  it  is  to  be  hoped,  arous- 
ing enthusiasm  among  students.  But  lectures  alone  entirely  fail 
to  do  justice  to  the  possibilities  inherent  in  economic  science  for 
rigorously  training  the  mind  in  habits  of  close  and  consecutive 
thought.  The  law  has  always  enjoyed  a  peculiar  and  well-merited 
prominence  among  other  studies  for  this  reason. 

The  first  requisite,  therefore,  for  the  successful  conduct  of 
economic  instruction  in  the  descriptive  field  is  to  provide  raw 
material ;  which  in  discussion,  supplementary  to  the  general  lec- 
tures, may  be  worked  over  in  detail  in  the  classroom.  Such 
material,  by  reason  of  the  great  increase  in  economic  periodical 
literature  since  1890,  is  now  rapidly  augmenting.  Yet  with 
classes  often  aggregating  in  such  economic  courses  from  one 
to  two  hundred  men,  as  at  Harvard  University,  resort  by  each 
student  to  the  files  of  such  periodical  literature  is  out  of  the 
question.  Public  documents  are  also  impossible  for  reference 
reading  with  a  class  of  considerable  size.  And  finally,  in  my 
judgment,  a  generally  neglected  and  amazingly  rich  find  lies  em- 
bedded in  the  mass  of  factual  evidence  accumulated  in  the  course 
of  legal  proceedings  in  our  courts.  The  mere  decisions,  as  long 
currently  used,  are  of  course  well  known.  But  it  is  not  the  legal 
pronouncement  in  the  case,  infrequently  interlarded  with  brief 
statements  of  fact,  but  the  actual  testimony  adduced  — "The 
Record"  of  evidence  submitted  —  which  has  rarely  been  utilized. 
Such  matter  must  be  painstakingly  uncovered,  abridged,  even 
digested,  and  made  more  conveniently  accessible,  to  serve  its 
due  end  for  the  teacher.  To  direct  attention  to  this  material  by 
a  few  concrete  illustrations  from  such  sources,  reprinted  in  this 
volume,   is  not  an  unimportant  motive  in  its  production. 

A  second  incentive  to  the  preparation  of  the  original  volume, 
ten  years  ago,  was  the  hope  that  it  might  contribute  to  the  crys- 
tallization of  public  opinion  in  favor  of  a  fair  policy  of  govern- 
mental control  over  monopolistic  and  corporate  enterprises.  This 
revised  edition  affords  an  opportunity  to  record  the  complete 
conviction  of  the  people  of  the  United  States  in  favor  of  such 
a  policy.    The  recent  amendments  of  the  Anti-Trust  law  in  19 14 


PREFACE  vii 

mark  the  formal  entry  of  the  Federal  government  upon  a  course 
of  action  imposing  a  grave  responsibility  upon  its  administrative 
agents.  An  understanding  is  needed,  henceforth,  not  of  the 
general  principles  of  governmental  control  but  rather  of  the  ap- 
plication of  that  control  to  concrete  instances  of  real  or  fancied 
abuse.  The  need  of  an  annotated,  q^nzsi-official  literature  is 
insistent.  By  gathering  together  in  convenient  form  this  series 
of  papers  and  documents  it  is  confidently  hoped  that  progress 
toward  an  understanding  of  one  of  our  most  troublesome  public 
questions  may  be  in  some  degree  facilitated. 

Both  for  the  purpose  of  saving  space  and  in  order  to  avoid 
the  appearance  of  discontinuity  in  the  text,  it  has  seemed  best 
to  eliminate  many  footnotes  from  the  four  hundred  pages  of 
new  material  added  to  this  edition,  as  well  as  oftentimes  to  leave 
out  all  indication  of  solid  omissions  in  the  reading  matter.  The 
technical  student  under  such  circumstances  is  warned  always  to 
turn  to  the  original  article  or  document  for  detailed  citations. 

Acknowledgment  is  due  to  the  editorial  boards  of  the  Political 
Science  Qjiartcrly,  the  Economic  Journal,  the  Yale  Reviczv  and 
the  Qiiai'tcrly  Journal  oj  Economics,  and  in  even  greater  measure 
to  the  authors  of  the  several  papers  herein  reprinted,  for  permis- 
sion to  make  use  of  their  material  in  this  enterprise.  In  every 
instance  a  most  hearty  acquiescence  in  the  project  has  been 
expressed,  for  the  which  I  cannot  be  too  grateful.  Without  such 
assent  the  meagre  original  contributions  of  the  editor  would  have 
made  but  a  sorry  show.  To  my  former  teacher  at  Columbia, 
President  Goodnow  of  Johns  Hopkins  ;  to  my  former  assistants  at 
Harvard,  Professors  Tosdal  and  Dewing,  and,  with  a  peculiar  sense 
of  personal  attachment,  to  my  old  friend  Dr.  Francis  Walker, 
I  wish  especially  to  acknowledge  indebtedness.  This  volume  as 
it  appears  is  largely  the  work  of  professional  colleagues  and 
friends.  It  is  earnestly  to  be  desired  that  the  editor's  endeavors 
may  serve  to  direct  attention  anew  to  the  value  and  interest  of 
their  contributions. 

WILLIAM  Z.  RIPLEY 


CONTENTS 

PAGE 

Introduction.     By  William  Z.  Ripley xi 

CHAPTER 

I.     The  Michigan  Salt  Association.     (An  early  pool.)     By 

J.  VV.  Jenks        ........         i 

II.     The  Whiskey  Trust.     (A  legal  trust.)     By  J.  W.  Jenks      .       22 

III.  The  Wire-nail  Association  of  1895-96.     (And  other  iron 

and  steel  pools.)     By  Charles  E.  Edgerton         .         .       46 

IV.  The    Addystone    Pipe  Company.      (A    condemned  pool.) 

Argument  of  Hon.  E.  B.  Whitney      ....       78 

V.     Combination  in  the  Steel  Industry.     U.  S.  v.  U.  S.  Steel 

Corporation        ........       97 

VI.  U.  S.  Steel  Corporation  Finance.  (Capitalization  and 
investment.)  From  Report,  U.  S.  Bureau  of  Corpo- 
rations       .         . 185 

VII.     The  U.  S.  Steel  Corporation's  Bond  Conversion.     (Im- 
prudent financing.)     By  Edward  S.  Meade  and  others     228 
VIII.     The  Tobacco  Monopoly.     (Recent  industrial  and  financial 
experience.)     From  Report,  U.  S.  Bureau  of  Corpo- 
rations       .........     269 

Foreign  Interests  of  the  Tobacco  Combination  .         .         .     298 
Prices,  Costs  and  Profits    .         .         .         .         .         .         -313 

IX.     The     International     Harvester    Company.       (A   clean, 
straightforward  combination.)     From  Report,  U.  S. 
Bureau  of  Corporations       .         .         .         .         .         -3-4 

X.    The  International  Mercantile  Marine  Company.     (Fla- 
grant overcapitalization.)     By  Edward  S.  Meade        .     356 
XI.     The  United  States  Leather  Company.     (Corporate  reor- 
ganization.)    By  Arthur  S.  Dewing  ....     372 

XII.     The  United   States   Shipbuilding   Company.     (Financial 

manipulation.)     By  Hon.  James  Smith,  Jr.         .         .     403 


TRUSTS,    POOLS   AND    CORPORATIONS 


CHAPTER 
XIII 


(Fraudulent  promotion.)      By 


The  Asphalt  Combination. 

Henry  Tatnall,  Esq 

XIV.     Trade  Comiunations  at  Common  Law.     By  Frank  J.  Good 
now    ....■•••• 

XV.    The  Sherman  Act 

Text  of  the  Anti-Trust  Law,  1890       .... 
History  and  Interpretation.     By  V^illiam  Z.  Ripley    . 
XVI.     Early  Supreme  Court  Decisions,  1890-1901 
The  Knight  Case 
The  Addystone  Pipe  Co.  Decision 
Minor  Early  Opinions 
.XVII.     Definitive  Anti-Trust  Law  Interpretation,   1901-1911 
The  Standard  Oil  Decision 
The  American  Tobacco  Co.  Opinion 
XVIII.     The   Rule  of  Reason   Applied  Concretely,   1911-1915 
The  Bathtub  Case      .... 
The  International  Harvester  Opinion 
The  Keystone  Watch  Decision 
The  National  Cash  Register  Case 
XIX.     A.mend.ment  of  the  Sherman  Act,  1914 
The  Trade  Commission  Law 
The  Clayton  Act       ...         . 
\X.    The  Law  concerning  Monopolistic  COxMbinations  in  Con- 
tinental Europe.     By  Francis  Walker   . 
X.XI.     Tin-:    British    Co.mpanies    Act    of    1900.      By   Montague 

Barlow .         . 

X.XII.     Corporate     Promotion    and     Finance    in     Germany. 

(Public  opinion  and  law.)     By  Ernest  Schuster 
X.XIII.     The  German  Potash  Syndicate.     (A  typical  Kartell.)     By 

H.  R.  Tosdal 

XXIV.     The  Ger.man  Steel  Syndicate.     (An  officially  recognized 

monopoly.)     By  Francis  Walker         .         .         .         . 

I.NDEX •      .         .         .         . 


439 

451 

484 
484 
486 

506 

533 
546 

550 
552 
592 

606 
634 
655 
672 

703 
704 

715 
735 
760 

774 
795 
833 


INTRODUCTION 

THE  historical  development  of  the  so-called  Trust  Problem 
in  the  United  States  naturally  falls  into  five  more  or  less 
clearly  defined  periods.  The  revival  of  industry  following  the 
long  depression  of  1873-1879  began  the  modern  development  of 
large-scale  production.  Corporations  embodying  the  principles 
of  hmited  liability,  delegated  management  and  indirect  owner- 
ship became  increasingly  prominent  after  1880.  The  first 
period  in  our  trust  history  may  be  said,  therefore,  to  extend  from 
about  this  time  until  1887.  It  was  characterized  by  a  steady 
increase  in  the  size  and  number  of  large-scale  industrial  units. 
Various  pools  and  the  Standard  Oil  Trust  foreshadowed  the 
future.  The  decade  from  1887  to  1897  forms  the  second  period. 
It  was  the  time  of  the  trust  in  the  strict  legal  sense.  Standard 
Oil  Trust  success  since  1882  invited  imitation  in  the  two 
important  industries  of  distilling  and  sugar  refining.  The 
progress  of  monopoly  was  such  that  an  outbreak  of  state  anti- 
trust laws  from  1889  to  1893  indicated  how  fully  public  interest 
had  turned  from  the  regulation  of  railroads  to  that  of  industrial 
monopoly.  It  was  assumed,  in  fact,  that  the  railroad  question 
had  been  in  a  large  measure  settled  by  the  enactment  of  the 
Interstate  Commerce  Act  in  1887.  As  instanced  later  in  this 
brief  review,  the  entire  failure  of  the  trust  expedient,  however, 
in  furnishing  a  legal  basis  for  m.onopoly  led  to  various  other 
devices,  notably  pooHng.  And  the  continuation  of  industrial 
depression,  during  the  four  years  to  1897,  rendered  constructive 
development  unlikely.  The  third  period,  from  1897  until  the 
Northern  Securities  decision  in  the  spring  of  1904,  was  largely 
influenced  by  the  phenomenal  prosperity  which  began  in  the 
former  year  and  culminated  in  1902.  The  organization  of  com- 
binations in  various  branches  of    iron    and  steel  manufacture, 


xu 


TRUSTS,    POOLS  AND    CORPORATIONS 


followed  by  the  great  outbreak  of  corporate  promotion  in  1899, 
led  up  to  the  formation  of  the  U.  S.  Steel  Corporation  in  1901. 
This  time  it  was  the  holding  company,  organizing  under  the 
laws  of  the  charter-mongering  states  which  seemed  to  offer  a 
convenient  substitute  for  the  old  and  discredited  form  of  trust 
The.  fourth  period  in  the  development  of  monopoly  begins 
with  1902.  It  was  characterized  by  sore  trial  and  bitter  experi- 
ence, both  economic  and  legal.  Speculative  scandals  hereafter 
discussed;  the  panic  and  bankruptcies  of  1903;  the  failure  of 
bright  promises  of  promoters ;  keen  popular  interest  in  railroad 
legislation  and  the  tariff;  each  and  all  of  them  were  accom- 
panied by  a  growing  demand  for  publicity.  An  outstanding 
event  was  the  Supreme  Court  condemnation  in  1904  of  the 
device  of  the  holding  company  in  the  Northern  Securities  case. 
In  the  same  year  the  United  States  Bureau  of  Corporations 
was  estabHshed  and  at  once  initiated  an  elaborate  series  of 
reports  upon  industrial  combinations.  Within  two  years  after 
1905  came,  successively,  the  Hughes  New  York  insurance  in- 
vestigation, the  "  Beef  Trust,"  the  Metropolitan  Street  Railway, 
the  Harriman  railroad  and  the  Havemeyer  sugar  episodes. 
Suggestions  of  additional  restrictive  legislation  came  from  the 
National  Civic  Federation,  as  well  as  from  a  number  of  Congres- 
sional committees.  The  tide  of  progressivism  was  evidently 
rising,  manifested  on  all  sides,  concerning  pure  food,  labor  and 
transportation  as  well  as  industrial  monopoly.  The  climax 
came  in  the  vigorous  application  of  the  antitrust  law  by  the 
Taft  administration,  which  surpassed  even  the  Roosevelt  regime 
in  its  insistence  upon  strict  compliance  with  the  law  as  it  then 
stood  upon  the  statute  books.  The  logical  outcome,  of  this  mass 
of  htigation  was  the  great  Standard  Oil  decision  of  191 1,  which 
brought  the  fourth  period  in  the  development  of  the  trust  prob- 
lem to  a  close.  It  unquestionably  favored,  if  it  did  not  actually 
necessitate,  the  legislation  of  19 14  with  which  the  latest  period 
in  our  chronicle  is  largely  concerned.  The  full  significance  of 
that  event  will  appear  in  due  course. 

During  the  generation  which  has  now  elapsed  since  industrial 
monopoly  first  took  its  rise  in  the  United  States,  as  it  thus  ap- 


INTRODUCTION  xiii 

pears,  a  succession  of  distinct  legal  devices  have  -fe^ en  utilized 
as  a  basis  for  organization.  In  order  of  appearance  these  have 
been,  the  pool,  the  trust,  the  simple  corporation,  and  the  finance 
company  or  holding  corporation. 

The  pool  \2,  probably  the  oldest,  the  most  common  and  at  the 
same  time  the  most  popular,  mode  of  obviating  the  evils  of  com- 
petition. Industrial  pools,  in  fact,  appear  at  every  stage  of  our 
economic  growth  since  the  Civil  War.  They  are  not  even 
eliminated  by  gigantic  mergers,  so  long  as  the  latter  fall  short 
of  complete  monopoly.  Thus  even  the  most  powerful  present- 
day  combinations,  such  as  the  United  States  Steel  Corporation, 
have  at  times  found  it  necessary  to  become  parties  to  pooUng 
arrangements  with  independent  producers.  The  secrecy  of 
these  agreements,  owing  to  a  wholesome  fear  of  the  law,  has 
rendered  them  apparently  less  widespread  and  effective  than 
they  perhaps  were  in  fact.  Such  agreements  may  even  be 
international  in  their  scope,  as  shown  by  the  allotment  of  the 
European  export  trade  in  steel  rails  in  1904  between  the  great 
German  steel  combination,  known  as  the  Stahlwerksverband,^ 
and  the  English  rolling  mills.  A  seemingly  undue  amount  of 
attention  has  been  devoted  to  the  subject  of  pools  in  this  volume, 
because  of  their  persistency  and  of  the  light  which  they  throw 
upon  the  disadvantages  of  excessive  competition. 

A  type  of  the  earliest  form  of  pool  is  afforded  by  the  Michi- 
gan Salt  Association,  dating  practically  from  1868.  As  de- 
scribed hereinafter  in  detail,^  this  was  an  agreement  for  the 
purchase  of  the  entire  output  of  all  the  important  producers  in 
a  certain  field.  Similar  agreements  were  certainly  operative  in 
the  decade  1880-1890,  as  in  the  manufacture  and  sale  of  cotton 
bagging,  wherein  was  controlled  perhaps  two  thirds  of  the  out- 
put of  the  country.  The  most  notable  pools  twenty  years  ago, 
however,  arousing  widespread  attention,  were  in  the  distilling 
industry.  In  1882  and  even  probably  earlier,  until  the  formation 
of  the  trust,  a  Hmitation  of  output  and  allotment  of  sales  was  cer- 

1  Described  in  Chapter  XXIV,  infra. 

~  Stevens,  Industrial  Combinations  and  Trusts,  p.  I.  ff.,  reproduces  several  such 
early  agreements.  The  economic  background  is  described  in  Ripley,  Railway  Prob- 
lems (rev.  ed.),  p.  216  et.  seq. 


xiv  TRUSTS,    POOLS   AND   CORPORATIONS 

tainly  relied  upon  to  prevent  undue  competition.^  The  well- 
known  pools  in  the  cordage  manufacture  dating  from  i860  are 
also  cases  in  point.  A  far  less  defensible  scheme  from  a  moral 
point  of  view,  revealing  the  possible  evils  inherent  in  pooling,  is 
illustrated  by  the  case  of  the  Addyston  Pipe  Company.  Our 
record  of  this  combination  ^  shows  it  to  have  consisted  of  an 
agreement  among  competing  producers  to  fix  a  monopolistic 
price  by  means  of  fictitious  bids,  with  a  division  of  the  field  to 
insure  complete  local  monopoly  for  each  plant.  More  recently 
still,  and  developing  a  peculiar  vigor  since  the  failure  of  other 
attempts  at  monopolization,  either  by  outright  purchase  or  a 
holding  company,  were  the  pools  in  the  iron  and  steel  industry. 
These,  as  described  in  Chapter  III,  sought  to  promote  stability 
of  prices  in  a  field  peculiarly  subject  to  violent  industrial  fluctua- 
tions. When  reasonably  and  fairly  administered,  having  due 
regard,  that  is  to  say,  to  the  welfare  of  the  consuming  public, 
such  agreements  might  well  serve  to  steady  prices;  but  when 
otherwise  managed,  rapaciously  enhancing  prices,  such  pools 
have  miserably  failed,  with  greater  evils  both  to  the  public  and 
their  own  membership  than  those  whose  prevention  was  sought. 
These  pools  are  veritably  protean  in  form,  ranging  from  simple 
"business  meetings  with  a  social  aspect"  Hke  the  Gary  dinners 
of  1897-1898  in  the  steel  trade  (p.  178),  to  the  most  elaborate 
arrangements  Hke  the  Wire  Nail  Association  of  1895-1896,' 
and  the  German  Kartells,  exemplified  in  this  volume  by  the 
potash  syndicate  and  the  Stahlwerksverband.*  These  German 
pools,  it  will  be  observed,  are  all  tolerated  by  the  government 
under  the  law  concerning  monopolistic  combinations.*  The 
Prussian  government  actually  participates  as  a  syndicate  member 
in  the  potash  agreement.  What  a  contrast  in  policy  with  that 
pursued  by  the  United  States  ! 

A  highly  specialized  form  of  monopolistic  agreement  known 
as  the  patent  pool  was  apparently  derived  from  the  experience 

^  See  pp.  22  et.  seq. 
2  Pp.  78  and  533,  infra. 
■''  Chapter  III,  infra. 

••  Chapters  XXIII  and  XXIV.     The  German  coal  Kartell  is  carefully  analysed  by 
Dr.  Francis  Walker  in  Pubs.  Amer.  Economic  Ass.,  3d  ser.,  vol.  V.,  1904. 
''  Chapter  XX,  infra. 


INTRODUCTION  xv 

of  the  wire  nail  combination,  the  details  being  worked  out  by 
the  attorneys  formerly  in  charge  of  that  organizati^a.  Until  it 
was  brought  to  book  finally  in  the  bathtub  proceedings,  re- 
printed herein,  the  plan  was  extensively  employed,  with  large 
profit  to  the  managers.  One  office  in  New  York  alone  managed 
something  like  fifty  organizations  of  this  type.  The  pool  was  at 
once  rendered  stable  and  enforceable  by  making  use  of  the  form, 
if  not  the  substance,  of  patent  privileges.  Such  patents  as  bore 
upon  the  process  or  commodity  were  first  united  in  the  hands  of 
a  single  individual  or  corporation.  All  participants  in  business 
thereafter  were  controlled  by  means  of  licenses,  under  which 
royalties  based  upon  sworn  statements  of  production  were 
turned  in  to  a  central  treasury.  Good  behavior,  —  that  is  to 
say,  the  maintenance  of  prescribed  prices  and  practices,  —  was 
enforced  by  deposits  resembling  in  form  the  deferred  rebate 
contracts  of  the  British  shipping  rings.  Thus  under  the  bath- 
tub agreement  each  licensee  paid  $125  monthly  for  the  privilege 
of  operating  a  furnace,  on  the  understanding  that  $100  of  this 
was  to  be  paid  back  at  the  end  of  three  months.  This  left, 
after  the  first  four  months,  $300  continuously  on  deposit  for  the 
good  behavior  of  each  furnace  regularly  operated.  Security 
aggregating  almost  $50,000  was  in  this  manner  given  for  a  con- 
tinuance of  the  established  trade  practices.  The  bathtub  case, 
reprinted  in  Chapter  XVIII,  is  chosen  from  among  several  be- 
cause it  affords  the  clearest  exposition  of  the  plan  and  also 
because  its  successful  prosecution  by  the  government  brought  a 
considerable  series  of  pools  of  this  type  to  an  end.  The  en- 
tirely artificial  nature  of  the  plan  is  evident  from  the  fact  that 
the  patent  selected  was  not  vital,  but  was  utilized  merely  as 
a  means  to  the  end  of  effective  restraint  of  trade.  The  abortive 
patent  pool  in  the  Portland  cement  business  in  191 1  affords 
another  example  in  this  regard  similar  to  the  bathtub  case. 

The  common  patent  pool  was  so  specious  in  character  that  it 
presented  little  difficulty  to  the  economic  analyst.  But  the  case 
is  quite  different  where  widespread  combination  is  based  upon 
the  ownership  of  patents  which  are  really  basic.  For,  as  re- 
peatedly held  by  the  courts,  a  patent  monopoly  will  be  upheld 
only  when  it  is  essential  and  not  when  it  serves  merely  as  a 


xvi  TRUSTS,   POOLS  AND   CORPORATIONS 

device  to  promote  monopoly.  Litigation  over  the  use  of  the 
Selden  patent  in  1909-1911  by  the  Association  of  Automobile 
Manufacturers ;  in  the  United  Shoe  Machinery  Co.  prosecu- 
tions ;  1  and  particularly  in  the  Eastman  Kodak  and  Motion 
Picture  companies  decisions  of  1915,^  respectively,  afforded 
opportunity  to  test  the  fine  distinction  between  the  rights  of 
patentees  in  inventions  and  the  interest  of  the  public  in  the 
perpetuation  of  a  fair  and  open  field  for  trade.  The  marked 
dissimilarity  in  circumstances  between  these  various  cases  indi- 
cates the  need  of  clearer  definition  of  the  conflicting  rights  of 
individuals  and  of  the  people  at  large.  Patent  rights  should  not 
be  used  as  a  shield  to  nullify  the  Sherman  Act ;  and  yet,  as  held 
in  the  shoe  machinery  case,  it  may  be  no  offense  to  aggregate 
patents  to  such  a  point  that  practical  monopoly  results.  Until 
the  Supreme  Court  shall  pronounce  finally  upon  these  matters 
the  cases  selected  in  Chapter  XVIII  appear  best  to  embody 
the  state  of  judicial  opinion. 

Obvious  as  are  the  advantages  of  successful  pooling  contracts 
to  producers,  they  suffer  from  two  inherent  defects.  The  first 
of  these  is  that  they  are  at  variance  with  the  underlying  prin- 
ciples both  of  common  and  statute  law,  and  hence  are  not 
enforceable  in  the  courts.  No  effective  guarantee  for  good 
faith  is  afforded  other  than  by  the  mechanism  of  deposits,  the 
imposition  of  fines  and  other  more  or  less  clumsy  devices.  And 
a  second  objection  lies  in  the  fact  that  pools  are  necessarily  but 
temporary  expedients  after  all,  affording  no  certainty  for 
stability  of  price  or  of  industrial  policy  over  any  extended 
period.  It  was  undoubtedly  conviction  upon  these  points  which 
led  to  the  attempts  in  the  late  '8o's  to  remodel  industrial  com- 
binations on  the  pattern  of  the  Standard  Oil  Trust  of  1882. 
On  the  other  hand  it  may  perhaps  be  affirmed  rightly  that  the 
very  indefiniteness  and  elasticity  of  these  pooling  agreements 
has  often  rendered  them  successful  when  more  rigid  devices 
would  have  proved  somewhat  ineffective  for  the  control  of 
prices  in  the  face  of  a  rising  tide  of  independent  production. 

An  express  trust  may  be  defined  as  an  organization  managed 

1  222  Fed.  Rep.  349. 

2  226  Fed.  Rep.  62,  and  225  Fed.  Rep.  800. 


INTRODUCTION  xvii 

by  a  board  of  trustees  to  which  all  the  capital  stock  of  the  con- 
stituent companies  is  irrevocably  assigned ;  in  other  words,  the 
original  shareholders  accept  the  trustees'  certificates  in  lieu  of 
former  evidences  of  ownership.  The  outline  of  a  typical  trust 
hereinafter  printed  will  serve  as  an  illustration.^  As  a  legal 
expedient  for  obviating  competition,  such  a  trust  is  usually  dis- 
cussed as  if  it  were  now  obsolete,  possessing  historic  interest 
alone.  This  is  only  in  part  true.  As  an  improvement  upon  the 
pool,  both  as  regards  stability  and  effectiveness,  certainly  it 
merits  the  importance  ascribed  to  it  during  the  decade  follow- 
ing 1887.  The  first  appearance  of  this  legal  expedient  dates, 
of  course,  from  the  formation  of  the  Standard  Oil  Trust  in 
1882.2  It  derived  added  prominence  through  the  formation 
of  the  Distillers  and  Cattle  Feeders'  Trust  (whisky)  and  the 
Sugar  Trust,  both  in  1887.  It  disappeared  with  the  final 
judicial  condemnation  under  adverse  state  and  Federal  legisla- 
tion in  the  years  1891-1892.  The  decision  in  the  case  of  the 
North  River  Sugar  Refining  Co.  and  the  Standard  Oil  Co.  in 
Ohio,  finally  proved  the  impossibiUty  of  this  legal  basis  for 
effecting  combinations.^  Recourse  was  necessarily  had,  there- 
fore, to  novel  expedients,  such  as  corporate  organization  under 
the  newly  revised  laws  of  New  Jersey  and  other  charter-barter- 
ing states. 

It  is  an  odd  coincidence,  that  organization  under  a  board  of 
trustees  issuing  certificates  representative  of  ownership  of  prop- 
erty, although  condemned  by  the  courts  and  obsolete  as  a 
resource  for  the  great  industrial  combinations  of  the  country  at 
large,  should  still  flourish  under  the  laws  of  Massachusetts. 
This  commonwealth  has,  in  the  main,  steadfastly  resisted  pres- 
sure for  a  loose,  or  even  for  a  very  liberal  policy  in  corporate 
legislation  ;  yet  it  is  conspicuous  among  the  other  states  to-day  as 
permitting  the  trust  form  of  organization  to  flourish.  This  is 
perhaps  indirectly  an  outcome  of  the  traditional  policy  of  the 
state  not  to  permit  the  holding  of  real  estate  for  investment  by 

^  Consult  Chapter  II,  pp.  22  et  seq. 

2  Pp.  554,  infra.  Miss  Ida  M.  Tarbell's  study  of  the  Standard  Oil  Co.  gives  full 
details  concerning  both  the  form  and  dissolution  of  this  trusteeship. 

3  Vide  p.  465,  i7ifra.     Both  decisions  are  reprinted  in  Stevens,  op.  cit.,  chapter  IV. 


xviii  TRUSTS,    POOLS   AND   CORPORATIONS  • 

corporations  organized  under  its  general  laws.  Moreover,  this 
latter  practice  would  be  difficult  under  the  common  law  rule 
against  perpetuities.  For  more  than  half  a  century,  therefore, 
real  estate  in  Boston,  if  held  for  permanent  investment  by  a 
number  of  people  jointly,  was  compelled  to  vest  its  title  in 
voluntary  associations,  managed  by  trustees.  An  important 
ruling  of  the  Massachusetts  supreme  court  in  1899,  upholding 
the  vaHdity  of  such  associations,  greatly  enhanced  their  prestige. 
At  one  time  there  were  no  fewer  than  sixty  real  estate  trusts  in 
the  city  of  Boston  alone,  holding  upwards  of  $60,000,000  of 
property. 

The  immunity  from  governmental  supervision  of  voluntary 
associations  under  trusteeship,  especially  as  regards  the  issue  of 
capital  stock,  under  the  strict  Massachusetts  anti-stock-watering 
laws  apphcable  to  corporations,  has  latterly  invited  an  extension 
of  the  principle  of  voluntary  association  into  the  fields  both  of 
transportation  and  industry.  Thus  the  Massachusetts  Electric 
Companies,  controlling  the  stock  of  several  hundred  miles  of 
street  railways  throughout  the  eastern  part  of  the  state,  is  managed 
through  a  board  of  trustees.^  The  board  issues  certificates  rep- 
resenting the  equitable  interest  of  the  original  stockholders  of 
the  constituent  companies  comprehended  within  the  enterprise. 
This,  it  will  be  observed,  is  quite  analogous  to  the  device  origi- 
nally adopted  by  the  original  sugar  and  Standard  Oil  combina- 
tions. The  Massachusetts  Gas  Companies  in  the  industrial  field 
have  likewise,  as  the  virtual  successors  of  the  New  England 
Gas  &  Coke  Co.,  acquired  control  of  the  illuminating  plants  in 
and  about  Boston.  In  the  field  of  private  enterprise,  there  was 
a  reorganization  in  191 1  of  the  Amoskeag  Manufacturing  Com- 
pany, owning  the  great  cotton  mills  at  Manchester,  N.  H.,  as  a 
voluntary  association  under  the  laws  of  that  state.  Its  former 
capital  stock  of  $  6,000,000  is  now  represented  by  participating 
certificates  having  no  par  value,  exchanged  at  the  rate  of  two 
for  each  old  preferred  share  and  three  for  each  common  share.^ 

1  Gerstenberg,  Materials  of  Corporation  Finance,  pp.  lo  ff.,  reproduces  its  declara- 
tion of  trust  in  full. 

■'The  prevalence  of  these  voluntary  associations  brought  about  a  special  investiga- 
tion by  the  Tax  Commissioner  of  Massachusetts  in  1912-1913  :   Mass.  House  doc.  No. 


INTRODUCTION  xix 

The  Ludlow  Associates  similarly  operate  very  terge  textile 
plants  in  Massachusetts  as  a  voluntary  association.  It  thus  ap- 
pears that  the  legal  principle  of  trusteeship  is  by  no  means 
obsolete ;  although  the  device  has  in  no  guise  been  revived  for 
the  purpose  of  consolidation  in  any  great  staple  interstate  in- 
dustry. 

The  Jiolding  co7'poration  came  into  vogue  in  the  late  '90's  as 
the  legitimate  successor  of  the  discredited  trust ;  but  the  lan- 
guishing condition  of  American  industry  for  several  years  follow- 
ing the  panic  of  1893- 1894  retarded  whatever  further  tendency 
toward  consolidation  might  then  have  occurred.  The  resump- 
tion of  trade  activity  in  1897  once  more  revived  the  forces 
making  for  combination.  At  the  same  time  the  renewal  of  con- 
fidence among  investors,  following  the  protracted  period  of 
speculative  dullness,  created  novel  and  unforeseen  opportunities 
for  industrial  promotion. ^  The  phenomenal  outburst  of  combi- 
nation which  took  place  during  the  two  years  following  1899  was 
largely  based  upon  the  use  of  this  new  legal  expedient,  the 
holding  company.  Until  about  1870  in  England,  and  twenty 
years  later  in  our  own  country,  the  weight  of  legal  authority 
had  been  adverse  to  the  holding  of  the  stock  of  one  corporation 
by  another.  Railroads  for  a  generation  had,  by  special  provision 
of  law,  controlled  subsidiary  companies  in  this  way.^  But  the 
passage  of  a  new  corporation  act  by  New  Jersey  in  1889  first 
legalized  the  practice  under  general  statutes.  Vast  possibilities 
were  involved  in  this  fundamental  change  in  American  corpora- 
tion law.  Companies  could  hereafter  be  organized  as  well  to  serve 
the  ends  of  bankers  and  promoters  as  those  of  industrial  effi- 
ciency. The  New  Jersey  type  of  corporation  need  have  no 
operating  duties  whatsoever,  other  than  to  hold  the  shares  of 
other  concerns,  elect  officers,  receive  dividends  from  constituent 
companies  and  turn  them  over  to  their  own  stock  or  bond 
holders.     It  was  necessary  merely  to  maintain  a  nominal  con- 

1646,  1912,  and  No.  1788,  1913.  The  Secretary  of  State  now  publishes  annually  as 
a  state  document,  the  text  of  all  such  voluntary  agreements.  A.  D.  Chandler,  Express 
Trusts  under  the  Common  Law,  191 2,  is  worth  consulting. 

1  The  extraordinary  combination  of  influences  at  work  in  this  period  are  best  de- 
scribed in  the  Quarterly  Jourtial  of  Economics  for  February  1905. 

2  Ripley,  Railroads:   Finance  and  Organization,  pp.  433  ff.,  gives  details. 


XX  TRUSTS,    POOLS   AND    CORPORATIONS 

nection  with  the  chartering  state  by  renting  desk  room,  display- 
ing a  sign,  going  through  the  form  of  an  annual  meeting  and 
rendering 'meager  annual  reports.^  Many  American  common- 
wealths, notably  Delaware,  Maine,  West  Virginia  and  North 
Dakota,  promptly  followed  the  example  of  New  Jersey,  profiting 
greatly  thereby  from  the  resultant  fees.  Only  two  states  seem 
to  have  wholly  resisted  the  temptation  to  authorize  the  holding 
company  by  the  amendment  of  their  industrial  codes. 

The  advantages,  financial  and  operating,  of  the  holding  com- 
pany were  apparent  from  the  start.  It  facilitated  the  promoter's 
task;  inasmuch  as  only  a  small  proportion  of  stock  in  each 
constituent  corporation  need  be  purchased  in  the  open  market 
in  order  to  give  control.  Formerly  the  acquisition  of  the  last 
few  outstanding  shares  of  a  company  at  private  sale  was  a 
stumbling  block  in  the  way  of  combination.  Territorial  and 
operating  division  of  the  business  was  much  easier,  where  the 
various  parts  might  each  be  assigned  to  a  separate  corporation. 
The  individuality  of  constituent  concerns,  trade-marks,  good  will, 
and  the  like,  might  be  perpetuated,  along  with  the  stimulation 
of  personal  interest  and  zeal,  by  leaving  a  considerable  fraction 
of  the  stock  ownership  in  subsidiary  companies  in  the  hands  of 
the  original  owners.  Even  the  difficult  task  of  apportioning  the 
business  among  a  number  of  rivals  might  be  accomplished  by 
having  all  competitors  represented  as  shareholders  in  a  central 
organization.  Thus  did  the  National  Packing  Co.,  the  National 
Electric  Lamp  Co.,  and  the  Temple  Iron  Co.  promote  indus- 
trial peace  and  good  will  under  virtual  monopoly  in  the  beef, 
the  electrical  manufacturing,  and  the  anthracite  coal  businesses, 
respectively.  Yet  relatively  few  concerns  seem  to  have  taken 
advantage  at  once  of  the  means  made  ready  to  hand  by  the  New 
Jersey  legislature.  The  American  Cotton  Oil  Co.  in  1889  and 
the  United  States  Rubber  Co.  four  years  later,  were  pioneers. 
The  time  was  propitious  in  many  ways,  except  for  the  prevalent 
industrial  dullness.  The  prospect  was  rendered  inviting  legally, 
by  the  attitude  manifested  toward  combination  by  the  United 

iThe  use  of  a  Maine  holding  company  in  the  affairs  of  the  thousands  of  miles  of 
railroad  system  in  Brazil  is  an  extreme  example  of  such  practice.  Lowenfeld  criti- 
cizes it  in  Finance- Univers,  Vol.  IV,  June  15,  1915,  p  I. 


INTRODUCTION  xxi 


States  Supreme  Court  in  1894  in  the  Knight  c3lSC:  But  the 
heyday  of  the  holding  company  did  not  dawn  until  the  outburst 
of  industrial  promotion  in  1898,  to  which  reference  has  already 
been  made.  The  success  of  the  first  combination  in  the  iron 
and  steel  business,  the  Federal  Steel  Co.,  pointed  the  way. 
Further  impetus  was  given  by  the  demonstration  that  if  the 
terms  of  exchange  for  capital  stock  could  be  so  arranged  that 
the  new  shares  had  an  apparent  money  value  greater  than  that 
of  the  old  certificates,  the  owners  might  be  depended  upon  to 
"act  naturally  like  a  flock  of  sheep."  ^ 

For  a  brief  period,  owing  to  the  advantages  above  mentioned, 
the  holding  company  device  assumed  peculiar  prominence  in  al- 
most every  branch  of  American  business  life.  In  mining,  the 
Amalgamated  Copper  Co. ;  in  merchandising,  the  Associated 
Merchants  Co.,  with  a  made-over  charter  from  Connecticut  of 
the  Columbian  Construction  Co.,  empowering  it  "to  conduct  any 
lawful  business  "  ;  in  transportation,  the  Northern  Securities  and 
the  Rock  Island  companies  for  interstate  business  and  a  host  of 
other  combinations  in  the  public  utilities  field  within  the  separate 
states,  —  were  all  built  upon  the  principle  of  a  parent  corporation 
which  controlled  its  subsidiaries  by  means  of  stock  holdings. 
Without  this  device  the  United  Steel  Corporation,  —  the  climax 
of  the  whole  movement,  —  with  its  aggregate  capitalization  of 
$1,400,000,000  would  have  been  impossible,  to  say  nothing  of 
the  great  tobacco  combination  constructed  upon  the  same  model. 
A  minor  outbreak  of  promotion  occurred  in  1908-1909  which 
brought  into  being  a  new  crop  of  merchandising  combinations 
and  of  such  manufacturing  concerns  as  the  General  Motors  Co. 
Here  again  the  holding  corporation  served  to  bind  the  various 
parties  together. 

By  this  time  experience  had  demonstrated  a  large  number  of 
disadvantages  inherent  in  the  departure  from  the  established 
legal  practice  that  one  corporation  should  not  be  permitted  to 
hold  stock  in  another.  Investors  refused  longer  to  act  like  a 
flock  of  sheep,  and  began  to  discriminate  between  immediate  and 
remote  ownership  of  tangible  property.     The  new  practice  was 

1  Pamphlet,  Holding  Companies,  by  Robert  F.  Herrick,  Esq.,  Boston,  Jan.  20, 
1909.     Cf.  p.  277,  tn/ra,  on  the  Consolidated  Tobacco  Co.  experience  of  1901. 


xxii  TRUSTS,    POOLS   AND   CORPORATIONS 

too  apt  to  invite  what  Dewing  characterizes  as  an  "  ahnost  hope- 
less tangle  of  direct,  indirect  and  contingent  liabilities."  This 
occurred  in  such  unfortunate  enterprises  as  the  New  England 
Cotton  Duck,  the  United  States  Realty  and  Construction  and 
the  American  Malting  companies.  The  invitation  to  the  manipu- 
lation of  accounts  and  to  secret  profits  for  insiders  is  exemplified 
in  our  reprints  dealing  with  the  affairs  of  the  ship-building  com- 
bination.i  "  The  division  of  individual  responsibility,"  as  Dewing 
puts  it,  the  divorce  of  control  and  responsibility  from  real  owner- 
ship, the  evil  of  padded  accounts  and  particularly  of  the  consoli- 
dated balance  sheet,  the  conversion  of  contingent  stock  hability 
for  dividends  into  fixed  charges  upon  bonds,  all  demonstrated 
anew  the  danger  to  investors  lurking  in  this  radical  departure 
from  precedent.  Furthermore  the  people  at  large  were  now 
taking  a  hand.  The  Northern  Securities  decision  frowned  upon 
the  device  in  railroading.  Legislative  proposals,  even  to  the  ex- 
tent of  absolute  prohibition  of  the  practice,  threatening  to  render 
the  holding  company  vulnerable  in  the  courts,  finally  resulted 
in  the  prohibition  of  the  practice  of  intercorporate  stock  holding 
altogether  by  New  Jersey,  the  pioneer,  in  191 3.  Is  this  the 
beginning  of  the  end  or  not  ? 

One  of  the  gravest  financial  objections  to  intercorporate  stock 
holding  is  the  ease  with  which  a  minority  of  stock  ownership 
may  perpetuate  itself  in  control  by  means  of  a  series  of  hold- 
ing companies  one  upon  another.  Where  the  holding  com- 
pany owns  practically  all  of  the  stock  of  the  constituent  cor- 
porations this  evil  is  absent.  In  the  Steel  Corporation,  the 
Agricultural  Chemical  Co.,  or  the  General  Motors  Co.,  there  are 
practically  no  minority  stockholders  whose  rights  may  be  jeop- 
ardized. But  the  principle  once  admitted,  there  is  no  limit  to 
the  amount  of  involution ;  nor  is  there  any  safeguard  against 
downright  oppression  of  a  large  majority  of  shareholders  by  the 
few.  Thus  the  United  States  Dry  Goods  Companies  under 
the  laws  of  Delaware  controls  the  Associated  Merchants  Co., 
with  a  Connecticut  charter  empowering  it  to  conduct  any  lawful 
business ;  while  it  in  turn  dominates  the  H.  B.  Claflin  Co.  of 
New   Jersey  through    the  ownership  of   45,001   out  of    90,000 

1  Chapter  XII. 


INTRODUCTION  xxiii 

shares  of  stock.  Under  such  circumstances  \vhat,j3ecomes  of 
the  essential  obHgations  of  managers  to  investors,  to  say  nothing 
of  the  relationship  of  so  devious  a  concern  to  the  authorities  of 
the  different  states  ?  ^  Fortunately  the  trend  at  the  present 
time  is  distinctly  away  from  both  the  holding  company  and 
the  practice  of  incorporation  in  the  charter-mongering  states. 
Many  concerns  are  simplifying  their  corporate  structure.  The 
Amalgamated  Copper  Co.  in  191 5  resolved  itself  into  its  con- 
stituent parts.  The  American  Malting  Co.  is  about  to  abandon 
its  holding  corporation.  The  American  Woolen  Co.  has  just 
deserted  New  Jersey  and  returned  to  Massachusetts,  corpora- 
tively,  where  it  belonged.  And  a  number  of  other  concerns 
now  manifest  a  disposition  to  follow  suit.  The  pure  finance 
corporation  may  in  time,  as  it  deserves,  come  to  be  a  specimen 
for  preservation  in  economic  museums. 

The  trust  movement  has  brought  to  Hght  a  number  of  evils  in 
corporate  finance,  or  rather  it  has  magnified  preexisting  ten- 
dencies which  had  been  apparent  only  on  a  small  scale.  The 
principal  ones  in  our  experience  are  imprudent  or  fraudulent 
promotion  and  subsequent  speculative  management.  It  is  diffi- 
cult at  all  times  to  draw  the  line  clearly  between  recklessness, 
inefl^ciency  and  dishonesty.  But  a  vast  increase  in  irrespon- 
sibility of  corporate  management  has  certainly  paved  the  way 
to  financial  practices  which  are  highly  objectionable,  if  not 
criminal.  The  examination  of  such  matters  forms  part  of  any 
comprehensive  treatment  of  the  corporation  problem. 

T\\Q. promotion  oi  an  industrial  enterprise  is  a  chancy  operation 
at  best.  Where  it  is  undertaken  on  behalf  of  others,  that  is  to 
say,  involving  the  use  of  their  funds  rather  than  the  employ- 
ment of  the  promoter's  own  capital,  an  added  premium  is  set 
upon  imprudence.  Certainly  many  of  the  promotions  of  the 
period  1 900-1 901  impress  the  onlooker  as  unwise  in  the  extreme. 
On  the  other  hand,  there  is  of  course  a  substantial  economic 
defense  for  the  payment  of  large  returns  to  those  who  incur 
the  risks  of  novel  enterprises.      But  even  with  full  allowance 

1  Cf.  Dewing's  diagram  of  the  organization  of  the  glucose  combination.  Op.  cil.^ 
p.  III. 


xxiv  TRUSTS,    POOLS   AND    CORPORATIONS 

therefor,  the  returns  of  both  organizers  and  banking  syndicates 
during  this  period  seem  to  be  excessive.  Where  promotion 
occurred  from  within  as  in  the  harvester  organization/  no 
ground  for  criticism  is  afforded.  More  debatable  is  the  warrant 
for  the  large  returns  which  accrued  to  underwriters  in  the  pro- 
motion of  the  U.  S.  Steel  Corporation. ^  In  a  different  group 
belong  the  reprehensible  practices  in  promotion,  which  merit 
the  name  of  downright  theft.  Two  notable  instances  are 
described  in  this  volume  by  the  official  reports  of  receivers  for 
the  asphalt  and  shipbuilding  combinations,  respectively.^  The 
veil  of  secrecy  thrown  about  the  promotion  of  the  Amalgamated 
Copper  Co.  has  been  sufficiently  lifted  at  times  to  warrant  the 
belief  that  exorbitant  profits  were  made  in  this  instance. 
Nefarious  practices  of  this  sort  have  already  been  condemned 
by  the  courts  in  several  notable  instances  of  late.*  But  the 
removal  of  the  incentive  to  reckless  promotion  through  stringent 
regulation  of  the  conditions  of  flotation,  as  is  done  in  the  excel- 
lent German  law  described  herein,^  would  seem  to  afford  com- 
plete protection. 

The  paymetit  of  unearjied  dividends  is  another  evil  which  in 
the  past  has  not  been  curbed  by  a  series  of  decisions  in  our 
American  courts  attempting  to  distinguish  clearly  between  capi- 
tal and  income  accounts.  Nice  questions  of  policy  are  involved 
in  the  determination  of  net  profits.  An  unwise  practice  of  many 
industrial  combinations  in  failing  to  provide  sufficient  reserves 
before  beginning  the  payment  of  dividends  has  frequently  pre- 
cipitated bankruptcy.  Most  unfortunately,  downright  decep- 
tion often  merging  into  fraud  has  at  times  been  adduced  in 
evidence.  The  asphalt  companies  clearly  exemplify  the  lack 
of  a  conservative  policy  in  accounting;  as  when,  for  instance, 
the  Audit  Co.  of  New  York  changed  an  apparent  surplus  of 
^758,000  to  a  deficit  of   $541,000.     The  United  States  Realty 

1  Pp.  324  and  634. 

2  Pp.  169  and  203. 

2  Pp.  203  and  439.  Dewing,  op.  cit.,  is  the  standard  authority  on  matters  of 
this  character. 

■*  On  the  liability  of  promoters  for  unrevealed  profits,  consult  the  review  of  cases 
by  the  editor  in  the  Journal  of  Political  Economy,  Vol.  VIII,  1900,  pp.  535  et  seq, 

^  Chapter  XXII,  p.  774. 


INTRODUCTION  xxv 

Co.  is  another  case  in  point.  Dividends  were  her^-paid  on  the 
basis  of  profits  on  uncompleted  contracts,  recalling  the  similar 
policy  in  the  case  of  the  U.  S.  Shipbuilding  Co.^  Numerous 
other  concerns  have  since  been  known  to  have  followed  the 
same  practice,  notably  the  New  England  Cotton  Yarn  and  the 
Virginia-Carolina  Chemical  Co.  Perhaps  the  worst  offender 
was  the  American  Malting  Co.,  in  a  case  so  extreme  and  so 
clearly  fraudulent  that  the  courts  in  1905  held  the  directors 
liable  both  to  creditors  and  stockholders  to  the  full  amount  of 
the  unearned  dividends  declared.^  It  is  earnestly  to  be  hoped 
that  a  few  more  judgments  of  this  kind  will  serve  to  restrain  the 
directorates  of  other  great  corporations. 

The  evil  of  speculative  management  falls  into  several  distinct 
parts.  The  earliest  form  which  it  took  was  the  buying  and 
selling  by  its  own  officers  of  the  securities  of  a  corporation  for 
speculative  purposes.  Of  this  sort  are  the  events  in  the  history 
of  the  Whiskey  Trust,  and  a  few  scattered  instances  such  as 
the  manipulation  of  Diamond  Match  funds  in  1896.  American 
corporations,  unHke  those  of  England  and  Germany,  fail  in  too 
many  instances  to  prohibit  dealings  in  the  securities  of  a  com- 
pany by  its  own  officers.  The  best  of  them  certainly  do  so,  and 
the  scandals  of  a  decade  ago  probably  emphasized  the  desira- 
bility of  preventing  this  evil.  An  unHmited  power  to  contract 
loans  without  the  approval  of  the  directors  or  stockholders,  as 
in  the  case  of  the  American  Ice  Co.,  is  also  a  constant  menace 
to  conservative  management.  Another  phase  of  this  matter 
concerns  the  temptation  to  industrial  management  with  a  view 
to  its  effect  upon  the  stock  market  rather  than  upon  the  per- 
manent welfare  of  the  company.  A  classic  example  is  afforded 
by  the  episode  of  the  American  Steel  &  Wire  Co.  in  1900. 
Secrecy  is  a  constant  invitation  to  the  insider  to  take  advantage 
of  forthcoming  events  at  the  expense  of  the  stockholders.  It 
is  undeniable  also  that  such  speculative  management  greatly 
encourages  speculative  ownership  on  the  part  of  stockholders. 
The  old-fashioned  investor,  secure  in  his  belief  in  the  stability 
of  his  company,  is  replaced   by  a  body  of  temporary  holders 

1  Pp.  403  et  seq. 

2  Dewing,  op.  cit.,  ably  reviews  this  experience. 


xxvi  TRUSTS,    POOLS  AND    CORPORATIONS 

who  look  for  the  returns  upon  their  investment  more  in  the 
chances  of  buying  and  selling  and  manipulation,  than  from  per- 
manent and  regular  dividends.  That  this  kind  of  ownership  is 
greatly  encouraged  by  the  very  low  quotations  of  the  stocks  of 
overcapitalized  companies  cannot  be  doubted. 

The  spread  of  the  practice  of  indirect  ownership  through  the 
mediation  of  holding  or  finance  companies  has  also  produced 
a  peculiar  set  of  abuses.  These  are  all  dependent  in  the  main 
upon  the  preservation  of  secrecy  as  to  the  exact  status  of  the 
operating  concern.  Dividends  or  deficits  may  be  shifted  at  the 
will  of  the  directors  from  one  to  another  company  of  the  hier- 
archy. Only  when  disclosure  is  forced  by  financial  stress  or 
judicial  proceedings  is  the  real  state  of  affairs  revealed.  Our 
reprint  of  the  Receiver's  report  of  the  United  States  Shipbuild- 
ing Co.  serves  to  illustrate  this  evil.-^  Other  instances  of  the 
creation  of  large  floating  debts  by  constituent  companies,  which 
debts  are  not  apparent  in  the  reports  of  the  parent  concern,  are 
familiar  in  the  case  of  the  United  States  Rubber  Co.  and  the 
New  England  Cotton  Yarn  Co.^  The  failure  to  disclose  may, 
however,  at  times  operate  in  the  other  direction.  Stock-holders 
are  induced  to  sell  because  of  failure  on  the  part  of  the  manage- 
ment to  make  clear  the  accumulated  profits  of  constituent 
companies.  This  would  seem  to  be  exemplified  in  the  recent 
history  of  the  companies  which  constituted  the  so-called  Tobacco 
Trust.  On  the  formation  of  the  Consolidated  Company  in  1901,^ 
the  majority  of  the  common  stocks  of  the  American  and  Con- 
tinental Tobacco  companies  were  taken  over  in  exchange  for 
four  per  cent  collateral  bonds.  The  holders  of  the  non-dividend 
Continental  stock  parted  with  their  property  without  any  knowl- 
edge whatever  of  the  profits  which  it  had  been  earning.  Only 
after  they  had  been  given  in  exchange  a  security  with  a  fixed 
return,  did  it  appear  that  very  large  profits  had  accrued.     In 

^  Pp.  403  et  seq.  Cf.  also  the  unhappy  experience  of  investors  in  the  National 
Lead  Co.  in  July,  1910  and  in  the  U.  S.  Finishing  Co.  in  1913.  In  the  latter  case, 
there  was  speculation  by  subsidiary  companies  both  in  merchandise  and  in  its  own 
securities,  resulting  in  losses  which  aggregated  $1,250,000. 

■■^  Cf.  the  N'.  Y.  Times  Atitialist.  July  5  and  19,  1915,  on  the  abominable  rubber 
stock  operations,  and  the  views  prevalent  among  directors  of  other  concerns. 

3  Pp.  277  et  seq. 


INTRODUCTION  xxvii 

fact,  the  dividends  of  the  Continental  Co.  were  s«e«  increased 
to  ten  and  afterward  to  sixteen  per  cent.  The  profits  to  those 
who  had  assumed  control  of  the  Consolidated  Company  were 
correspondingly  great ;  inasmuch  as  they  received  all  the  sur- 
plus income  over  the  fixed  returns  given  in  exchange  for  the  old 
securities.  It  is  the  possibility  of  such  shuflfiing  as  this  which 
rendered  the  bonds  of  the  Consolidated  Company  so  unpopular 
that  the  entire  plan  had  to  be  revised. 

Excessive  capitalization  in  proportion  to  tangible  assets  and 
earning  power,  according  to  public  opinion,  iS  one  of  the  most 
common  and  persistent  defects  in  American  corporate  organi- 
zation, especially  among  industrial  combinations.  Consumers 
allege  that  while  there  is  no  directly  traceable  relation  between 
capitalization  and  prices,  an  excess  of  securities  craving  dividends 
is  in  itself  an  indirect  incentive  to  unreasonable  charges.  How- 
ever true  this  may  be  of  public  service  or  other  natural  monopolies, 
so  many  factors  not  financial  enter  into  the  determination  of  the 
market  prices  of  most  commodities  as  largely  to  invalidate  this 
contention.  Was  not  the  Standard  Oil  Co.  until  very  lately 
one  of  the  most  modestly  capitalized  "  trusts  "  without  any  evi- 
dence of  an  effect  upon  its  price  policy  toward  consumers  .-'  Yet 
it  is  probably  true,  nevertheless,  that  the  absence  of  definite 
correlation  between  assets  and  capital  liabilities  is  a  source  of 
confusion  to  all  parties  concerned.  It  may  conceal  unearned 
profits  of  promoters  or  subsequent  mismanagement  by  directors. 
It  is  an  invitation  to  speculation  both  within  and  without.  It  is 
the  negation  of  fair  and  reasonable  publicity.  Overcapitalization 
is,  to  be  sure,  more  often  merely  a  symptom  of  disorder  than  a 
disease  in  itself.  And  it  is  certainly  the  nature  of  the  securities 
outstanding  rather  than  their  aggregate  amount  which  is  provoc- 
ative of  trouble.  Dividend  obligations  contingent  upon  earnings 
do  not  precipitate  trouble  as  do  heavy  burdens  of  fixed  charges 
upon  bonds  or  notes.  Yet  the  constant  association  of  an  exces- 
sive issue  of  securities  with  financial  distress  renders  a  conserva- 
tive policy  in  this  regard  almost  an  index  of  financial  stability. 

Most  of  the  industrial  promotions  of  1899-1901  were  seriously 
open  to  the  criticism  of  overcapitalization.  The  belated  experi- 
ment of  the  International  Mercantile  Marine  Co.,  included  in 


xxviii  TRUSTS,    POOLS   AND   CORPORATIONS 

these  reprints,  was  the  climax  of  reckless  financiering  in  this 
regard.!  j^  jg  reported  that  reorganization,  now  pending  under 
receivership,  is  to  cut  the  outstanding  body  of  securities  in  halves. 
An  equally  drastic  pruning  of  the  capitalization  of  the  American 
Malting  Co.,  the  source  of  whose  troubles  was  imprudent  finance, 
has  just  been  announced.  Quite  a  number  of  large  companies 
have  voluntarily,  or  in  the  process  of  reorganization,  reduced 
the  volume  of  their  outstanding  securities.  The  National  Lead 
Co.  in  1 89 1  reduced  its  capitalization  from  ninety  to  thirty  mil- 
Hon  dollars.  The  Distillers'  Securities  Corporation  now  has 
less  than  half  the  amount  outstanding  against  its  predecessors. 
The  New  England  Cotton  Yarn  Co.  by  one  stroke  eliminated 
the  good  will  item  from  its  accounts,  thereby  reducing  the  totals 
on  its  balance  sheet  by  about  five  million  dollars.  The  American 
Ice  Co.  represents  its  condition  in  the  following  words  of  its  own 
president :  "  It  is  clear  that  the  capitalization  is  excessive ;  that 
the  common  stock  represents  no  earning  capacity  even  under 
normal  business  conditions."  Other  recklessly  promoted  com- 
panies now  find  themselves  similarly  placed. ^  It  is  clear  that 
the  danger  of  overcapitalization  is  being  impressed  upon  all 
parties  concerned.  Experience  has  proved  indubitably  that  in 
the  long  run  the  conservatively  capitalized  companies  can  far 
better  command  bankers'  credit,  weather  periods  of  financial 
strain  and  hold  the  allegiance  of  investors.  Little  more  than 
publicity  and  standardization  of  accounts  would  seem  to  be 
essential  to  safeguard  whatever  interest  the  public  may  have  in 
the  larger  industrial  enterprises  of  this  sort. 

The  prime  interest  of  the  general  pubHc  in  the  maintenance  of 
reasonable  prices  is  comprehended  in  these  reprints  by  a  number 
of  separate  discussions.  Originally  and  for  many  years  it  was 
believed  that  an  extortionate  price  policy  was  the  invariable  ac- 
companiment of  combination.  This  resulted  in  all  probability 
from   the  success  with  which  the    petroleum,  beef    and   sugar 

1  Experience  to  191 5  is  described  in  Journal  of  Political  Economy,  XXIII, 
pp.  910-926. 

-  Cf.  the  checkered  career  of  the  New  England  cotton  duck  combination  ;  Dewing, 
op.  cit.,  chapters  XIII  and  XIV. 


INTRODUCTION  xxix 

"trusts"  augmented  prices  to  consumers  while  coiocidentally,  as 
it  appeared,  depressing  prices  to  the  producers  of  raw  material. 
There  is  little  doubt  that  complete  control  of  the  market  usually 
leads  to  such  conclusions.  Experience  with  the  wire-nail  pool  of 
1895,  the  bathtub,  watch  case  and  other  concerns^  confirms  this 
opinion.  But,  on  the  other  hand,  some  of  the  strongest  com- 
binations seem  to  have  abstained  from  pursuing  an  extortionate 
price  policy  at  all.  The  Steel  Corporation  has  an  enviable  record 
in  this  regard,  as  described  in  our  reprint  of  the  Federal  deci- 
sion in  Chapter  V.  The  avoidance  of  an  undue  depression  of 
prices  as  well  as  of  an  excessive  increase  seems  to  have  been 
the  end  in  view.  The  International  Harvester  Co.,  also,  as  rep- 
resented in  these  reprints,  is  not  open  to  the  charge  of  unduly 
enhancing  the  prices  of  its  products.  As  for  the  tobacco  com- 
bination, while  prices  seem  not  to  have  been  affected  appreciably 
either  before  or  after  dissolution,  it  is  clear  that  any  reduction 
following  the  removal  of  internal  revenue  taxes  was  prevented.^ 
Another  question  respecting  prices  concerns  the  welfare  of  com- 
petitors. It  is  unquestionable  that  arbitrary  manipulation  of  the 
market  both  as  between  persons  and  places  has  greatly  con- 
tributed at  times  to  drive  out  wholesome  rivalry  in  trade.  And 
the  specific  prohibition  of  local  price  discrimination  in  the  Clay- 
ton Act  of  1914^  is  intended  to  safeguard  the  public  interests  in 
this  respect.  The  latest  decisions  of  the  Federal  courts  inter- 
preting the  Sherman  Act  have  at  all  events  concluded  that  a 
"  free  and  untrammeled  traffic  of  the  marketplace,"  regardless  of 
the  particular  course  of  prices,  must  be  perpetuated  at  all  hazards. 

Unfair  competition  is  a  term  descriptive  of  practices  which 
have  been  disclosed  in  connection  with  a  number  of  prosecutions 
of  monopolies  in  recent  years.  The  leading  authority  upon  the 
subject*  enumerates  eleven  different  forms,  among  which  are 
the  operation  of  bogus  "  independent "  concerns ;   the  mainte- 

1  Pp.  46,  606  and  655. 

2  Pp.  313  ff. 

3  P.  715. 

*  W.  S.  Stevens,  Political  Science  Quarterly,  XXIV,  1914,  pp.  282-306  and 
460-490.  These  are  enumerated  also  in  the  La  Follette  bills,  reprinted  by  Stevens, 
op.  cit.,  p.  530. 


XXX  TRUSTS,    POOLS   AND   CORPORATIONS 

nance  of  "fighting  brands,"  cheaply  contrived  in  order  to  put 
competitors  out  of  business  ;  blacklists  and  boycotts  ;  espionage 
and  the  employment  of  detectives;  manipulation  of  the  market; 
rebates ;  preferential  contracts  and  the  like.  The  cases  re- 
printed herein  illustrate  but  a  part  of  these ;  although  so  far  as 
they  go  they  clearly  betray  the  jealous  regard  by  the  state  for 
the  rights  of  weaker  competitors  in  trade.  Noteworthy  among 
our  chosen  illustrations  of  unfair  practice,  are  the  following  :  the 
bathtub  and  Keystone  Watch  cases,  with  intimidation  and 
espionage ;  the  International  Harvester  Co.,  with  the  employ- 
ment of  bogus  or  secret  independent  concerns  in  the  early 
days  ;  and  most  predatory  of  all,  the  National  Cash  Register  Co., 
with  its  use  of  coercion  in  the  most  flagrant  forms.  Not  all 
these  unfair  practices  are  specifically  defined  in  the  amendments 
to  the  Sherman  Act,  of  1914,  soon  to  be  discussed  ;  but  a  clear 
appreciation  of  their  tangibility  and  occasional  enormity  is 
essential  to  an  understanding  of  the  pressing  need  for  prohibi- 
tive legislation  of  some  sort.  The  courts,  interpreting  the  Anti- 
Trust  law,  had  so  variously  and  conflictingly  defined  the  rights 
of  competitors,  that  the  business  man  was  left  in  doubt  as  to 
what  tactics  he  was  lawfully  entitled  to  adopt  in  trade ;  while 
the  public  on  its  side  was  offended  at  the  Hkelihood  that  force 
might  entirely  supplant  ability  and  efficiency  as  a  means  to 
commercial  success. 

The  existing  legislation  by  the  United  States  for  the  regula- 
tion of  monopoly  is  reproduced  in  this  volume  in  the  text  of  the 
original  Sherman  Anti-Trust  Act,  and  of  the  enactments  of  1914 
known  as  the  Trade  Commission  Law  and  the  Clayton  Act.^ 
Their  history  is  epitomized  in  each  case  by  means  of  the 
appended  editorial  notes.  So  much  of  the  meaning  of  this 
legislation,  owing  to  its  original  brevity,  'has  arisen  from  sub- 
sequent interpretation  in  the  Federal  courts  that  it  has  seemed 
best  to  devote  a  considerable  space  to  that  subject.  In  Chap- 
ter XV  the  history  of  the  original  legislation  and  its  application 
to  common  carriers  is  traced ;  while  the  remaining  decisions 
prior  to  1901  are  given  in  Chapter  XVI.^     The  editor's  notes 

1  Pp.  485,  704  and  715. 

2  p.   550. 


INTRODUCTION  xxxi 

summarize  the  development  preceding  the  Standard*Oil  decision 
in   191 1,  primarily  in  order  to  show  how  very  widespread  the 
application  of  the  law  came  to  be.     Few  branches  of  trade  in 
the  United  States  were  wholly  immune  from  prosecution.     Yet 
while  the  law  was  being  so  actively    enforced,  no    affirmative 
construction  of  the  statute  by  judicial  proceedings  ensued.     A 
hit-or-miss  policy  was  pursued  by  the  Department  of  Justice. 
But  at  last,  as  set  forth  in  the  introduction  to  Chapter  XVIII, 
the  necessity  of  squarely  facing  the  great  issues  involved  was 
presented  by  the   Standard   Oil  case.     Was  the  statute  to  be 
interpreted  as  utterly  prohibiting  combination  in  any  form ;  or 
was  a  meaning  to  be  read  into  it  which  should  permit  somewhat 
of  the  liberty  which  the  laws  of    continental  countries  allow? 
The  background  for  an  understanding  of  this  decision  is  con- 
stituted by  our  reprints  dealing  with  the  English  common  law 
concerning  monopoly  and  the  restraint  of  trade.^     The  estab- 
lished   policy    toward    combination   adopted  in  the   continental 
countries  of  Europe  is  outlined  in  Chapter  XX.     According  to 
French  law,  as  it  appears,  only  such  combinations  as  conspire 
to  advance    prices    above  a    competitive    level    are    prohibited. 
In  Austria  there  is  no  criminal  penalty  against   combination  ; 
but,  as  by  the  Enghsh    common    law   concerning   restraint   of 
trade,  the   protection  of   the   courts    is   withdrawn    from    such 
agreements,     thereby    rendering    them    null    and    void.     The 
German  practice,  by  way  of  contrast,  accords  complete  validity 
at  civil  law  to  combination  in  lieu  of  prohibition.     This  valida- 
tion of   pooHng  and  other  devices  it  seemed   best  to  describe 
fully  in  the  two  concluding  chapters.     The  German  potash  and 
steel  syndicates  embody  practically  all  of  the  essential  details  of 
organizations  of  this  sort.     One  of  the  first  tasks  set  for  itself 
by  the  new  Federal  Trade  Commission  being  to  organize  the 
American  export  trade,  the   domestic  policy  of   these    foreign 
countries  becomes  to  the  United  States  a  matter  of  international 
concern. 

1  Pages  453,  475  and  561.  Cf.  also  Harvard  Law  Review,  Vol.  XVII,  pp.  156 
and  217.  The  English  decisions  and  also  the  text  of  the  British  Companies  Act  is 
reprinted  in  convenient  form  by  our  House  Committee  on  Judiciary  as  "  Laws  on 
Trusts  and  Monopolies,  Domestic  and  Foreign,"  January  10,  1914. 


xxxii  TRUSTS,    POOLS  AND   CORPORATIONS 

Many  other  plans  for  dealing  with  the  problems  of  monopoly 
and  large-scale  business,  other  than  the  one  finally  embodied  in 
the  statutes  of  1914  here  reprinted,  were  brought  forward  during 
the  decade  of  active  discussion  of  the  subject.  Federal  incor- 
poration was  formerly  advocated  in  high  quarters  ;i  and  federal 
license  on  condition  of  good  behavior  was  also  warmly  espoused.^ 
In  view  of  the  decisive  step  taken  by  Congress  one  need  not  in- 
quire whether  these  plans  were  adequate  or  impracticable ;  nor 
whether  judicial  control  alone  in  place  of  continuous  administra- 
tive supervision  might  have  supphed  such  regulation  as  the 
abuses  of  the  time  seemed  to  require.^  The  Supreme  Court  of 
the  United  States  has  declared  that  the  anti-trust  law  of  1890, 
"  embraced  every  conceivable  act  which  could  possibly  come 
within  the  spirit  or  purpose  of  prohibitions  of  the  law,  without 
regard  to  the  garb  in  which  such  acts  were  clothed.  .  .  .  There 
was  no  possibility  of  frustrating  that  poHcy  by  resorting  to  any 
disguise  or  subterfuge  of  form,  since  resort  to  reason  rendered 
it  impossible  to  escape  by  any  indirection  the  prohibition  of  the 
statute."*  Uncertainty  still  prevails  only  as  regards  "all  those 
normal  and  usual  contracts  essential  to  individual  freedom,  and 
the  right  to  make  which  was  necessary  in  order  that  the  course 
of  trade  might  be  free."  The  extent  of  this  exception,  inserted, 
if  you  please,  in  the  act  by  judicial  construction  merely,  in 
accordance  with  the  rule  of  reason  remains  yet  to  be  defined. 
But  on  the  whole  it  would  seem  to  give  scope  to  such  activities 
in  business  as  are  fair  and  reasonable  even  though  they  may 
incidentally  diminish  competition  to  some  degree.  The  rigid 
strait-jacket  in  which  American  trade  and  manufacture  found 
itself  before  the  Standard  Oil  decision  of  191 1  and  the  amend- 
ments of  the  Sherman  Act  in  1914  has  been  loosed,  in  order  to 
permit  of  such  growth  and  freedom  of  action  as  are  compatible 
with  the  best  interests  of  the  community  at  large.     The  mandate 

1  President  Taft's  message  of  191 1;  Report  of  Commissioner  of  Corporations, 
1904;  Harvard  Law  Review,  Vol.  XXVI,  pp.  667-683,  and  Michigan  Law  Review, 
Vol.  II,  pp.  358  and  506. 

'^  U.  S.  Commissioner  of  Corporations,  1904,  1906  and  1909;  National  Civic 
Federation,  1908,  19 13. 

^  LLarvard  Law  Review,  Vol.  XVII,  1904,  pp.  156-247. 

^  P.  595  infra. 


INTRODUCTION  xxxiii 

given  to  the  newly  created  Trade  Commission  to  prjg^cribe  the 
precise  degree  of  this  relaxation  of  restraint  is  a  most  general 
and  sweeping  one,  —  not  less  so  than  the  order  to  the  Interstate 
Commerce  Commission  to  prevent  all  "  unreasonable  "  rates  and 
practices.  How  fully  this  body  will  respond  to  the  summons, 
and  actually  contribute  to  the  standardization  of  business  prac- 
tice in  the  United  States  upon  a  higher  plane  both  of  ethics  and 
of  efficiency,  time  alone  will  reveal. 

WILLIAM  Z.  RIPLEY 


TRUSTS,  POOLS  AND 
CORPORATIONS 

I 

THE    MICHIGAN    SALT   ASSOCIATION  i 

WITHIN  the  last  half  century,  the  amazing  comparative 
growth  of  capital  as  a  factor  in  production  ;  the  combi- 
nations of  workingmen  arising  from  their  forced  association  in 
manufacture  according  to  modern  methods,  and  the  ensuing 
discontent  —  or  rather,  the  frequent  and  increasingly  emphatic 
expression  of  discontent  —  with  their  lot  on  the  part  of  the 
workingmen,  as  combination  has  increased  their  sense  of 
strength ;  the  combinations  of  capitalists  and  the  startling 
revelations  of  power  afforded  by  such  organizations  as  the 
Standard  Oil  Company  and  the  coal  syndicates  of  Pennsylvania, 
—  all  these  things  have  lent  to  the  study  of  combinations  among 
either  capitalists  or  workingmen,  or  of  cooperative  unions  of  the 
two,  an  especial  interest.  More  frequently  the  subject  has  been 
studied  with  reference  to  workingmen,  the  advantages  and  dis- 
advantages to  them;  but  it  seems  no  less  desirable,  from  the 
standpoint  of  the  economist  at  least,  that  combinations  among 
capitalists,  either  for  purposes  of  protection  against  unreason- 
able demands  of  workingmen  or  for  their  own  interests  as  pro- 
ducers, should  be  studied;  and  that  the  investigation  should 
cover  the  influence  of  such  combinations  on  the  consumers  as' 
well  as  upon  the  capitalists  themselves. 

The  story  of  the  Standard  Oil  Company  has  been  told  more 
than  once,  in  words  eloquent  with  the  conviction  of  the  danger 
threatening  our  government  and  civilization  from  the  growth  of 
such  corporations.  The  consumers  of  anthracite  coal  through- 
out the  United  States  during  the  past  two  years,  have  needed 

1  From  the  Political  Science  Quarterly,  Vol.  Ill,  1888,  pp.  78-98.  For  additional 
references,  see  footnote  on  p.  21  infra. 

I 


2  TRUSTS,  POOLS  AND   CORPORATIONS 

no  publicist  to  tell  them  that  some  powerful  influence  has  been 
brought  to  bear  upon  the  price  of  this  product.  Although  far 
less  in  power  than  either  of  the  combinations  mentioned,  the 
Michigan  Salt  Association,  from  the  extent  of  its  influence  over 
the  price  of  an  article  of  food  so  common  and  so  necessary  as 
salt,  as  well  as  from  the  magnitude  of  its  operations  and  its 
great  and  apparently  increasing  power,  seems  to  be  a  fit  subject 
for  a  study  of  this  kind.  The  extent  of  the  influence  of  the 
association  may  be  noted,  when  we  consider  that  Michigan  pro- 
duces more  than  40  per  cent  of  all  the  salt  manufactured  in  the 
United  States,  and  that,  of  the  Michigan  product,  not  far  from 
95  per  cent  will  be  sold  by  the  association  during  the  coming 
year.  In  short,  speaking  generally,  the  price  of  the  salt  con- 
sumed in  all  the  Northern  states  west  of  Pennsylvania  and  New 
York,  until  we  approach  those  bordering  on  the  Pacific  ocean, 
is  the  price  set  by  the  managers  of  this  association.  It  is  the 
purpose  of  this  article  to  give  a  short  sketch  of  the  history  of 
this  combination  of  manufacturers,  with  that  of  others  which 
preceded  it ;  to  describe  its  plan  of  organization  and  its  work, 
and  to  estimate  the  influence  which  it  has  exerted  and  that 
which  it  can  exert  on  the  price  of  salt. 

The  early  settlers  of  Michigan  had  learned  from  the  Indians 
of  the  existence  of  many  salt  "  licks,"  or  springs,  in  different 
parts  of  the  state,  and  it  was  thought  even  by  them  that  there 
was  an  opportunity  for  the  growth  of  a  great  industry  in  its 
manufacture.  In  1838  Dr.  Houghton,  the  state  geologist,  called 
the  attention  of  the  legislature  to  these  facts,  and  suggested 
that  an  appropriation  be  made  for  the  sinking  of  test  wells. 
The  time  was  propitious  for  such  a  request.  The  newly  adopted 
constitution  had  declared  :  "  Internal  improvements  shall  be 
encouraged  by  the  government  of  this  state  ;  "  and  the  governor 
had  been  authorized  by  the  ambitious  first  legislature  to  borrow 
on  the  credit  of  the  state  the  sum  of  $5,000,000,  to  constitute  an 
internal  improvement  fund.^  From  this  fund  $3000  were  at 
once  appropriated  ;  the  next  year  $15,000  more,  and  small  sums 
in  succeeding  years.  While  salt  was  found,  the  wells  were  not 
sunk  deep  enough  to  yield  brine  in  paying  quantities. 

1  Cooky,  Michigan,  ch.  xiv.     [American  Commonwealth  Series.] 


THE   MICHIGAN   SALT  ASSOCIATION 


In  1859,  an  act  was  passed  exempting  from  taxatiOff  all  prop- 
erty used  in  the  manufacture  of  salt  and  offering  a  bounty  of  ten 
cents  per  bushel  on  all  salt  made  in  the  state.  A  corporation, 
the  Saginaw  Salt  Manufacturing  Company,  was  formed  the 
same  year  in  East  Saginaw  to  put  down  a  well  and  engage  in 
the  manufacture  of  salt.  So  little  was  known,  even  by  the 
board  of  directors  and  officers  of  the  company,  regarding  the 
character  of  the  work,  that  it  was  necessary  for  a  committee 
to  visit  the  Onondaga  salt  works  to  learn  what  buildings, 
machinery,  and  tools'  were  necessary  for  boring  the  well.  But 
by  February  7,  i860,  the  directors  felt  warranted  in  making  a 
report  to  stockholders,  declaring  the  work  a  success.  In  March 
the  well  was  completed ;  another  one  was  immediately  put 
down  ;  and  manufacture  began  in  July.  The  works  were  thrown 
open  for  inspection  July  4.  In  this  first  year,  i860,  about  4000 
barrels  of  salt  were  manufactured. ^ 

As  soon  as  it  became  known  that  brine  of  paying  quality  and 

quantity  was  to   be   found    in    the  valley,  capital  was  rapidly 

invested.     In  1862,  243,000  barrels  were  made,  and  in  six  years 

there  were  engaged  in  the  manufacture  of  salt  in  the  Saginaw 

valley,  sixty-six  different  companies  with  an  investment  of  nearly 

$2,000,000. 

TABLE  I 


Annual  Salt  Product  of  Michigan,  1S60-1886 


Year 
i860 

1861 
1862 


Barrels 

4,000 

125,000 

243,000 


[863 466,356 


1864 
1865 
1866 
1867 
1868 
l86q 


529.073 
477,200 
407,077 
474.721 
555.690 
560,818 


1870 621,350 

1871 728,175 

1872 724,481 

1873 823,346 

1  Statistics  relating  to  the  Saline  Interests  of  Michigan,  by  S.  S.  Garrigues,  Ph.D, 
State  Salt  Inspector;   Lansing,  1881. 


Year 
1874 

1875 
1876 
1877 
1878 
1879 
1880 
i88i 
1882 
1883 
1884 
1885 


Barrels 
1,028,979 
1,081,865 
1,462,729 
1,960,997 
1,855,884 
2,058,040 
2,676,588 
2,750,299 
3.037.317 
2,894,672 
3,161,806 
3,297,403 

3.677.257 


4  TRUSTS,   POOLS   AND   CORPORATIONS 

This  table  shows,  in  the  falling  off  of  the  yearly  product,  1865- 
1867,  the  result  of  the  rapid  and  in  many  instances  ill-advised 
investment  of  capital.  Under  the  conditions  obtaining  at  the 
time,  unrestricted  competition  soon  drove  the  weaker  companies 
to  the  wall.  In  those  days,  the  extent  of  the  salt-producing 
territory  and  the  methods  of  manufacture  were  less  well  known, 
and  the  business  was  much  more  of  a  natural  monopoly  than 
now.  Under  these  circumstances,  the  solution  of  the  difficulty 
was  evident :  combination  was  indicated  and  combination  soon 
appeared.  In  a  statistical  summary  of  the  leading  products  of 
the  Saginaw  valley,  published  by  TJic  Saginaw  Daily  E^iterprise 
in  1867,  we  read:  "This  interest  [salt]  is  somewhat  under  a 
cloud  at  present  through  the  evil  influence  of  speculation  and 
inconsiderate  management."  Then,  farther  down  the  page 
come,  as  one  might  expect,  the  words :  "  At  least  two-thirds  of 
those  [blocks]  now  running  turn  in  their  production  to  the 
Saginaw  Salt  Company."  Thus,  as  early  as  1866,  six  years  only 
after  the  industry  was  started,  we  find  that  many  of  the  manu- 
facturers were  uniting  their  interests  so  far  as  the  sale  of  the 
product  was  concerned. 

Soon,  from  individual  agreements  the  leading  firms  came  to 
something  more  stable  and  far-reaching  in  its  influence.  On 
the  1 6th  of  April,  1868,  the  articles  of  association  of  the 
Saginaw  and  Bay  Salt  Company  were  adopted.  The  first  year 
of  its  existence,  this  association  handled  four-fifths  of  all  the 
salt  shipped  from  the  Saginaw  valley.  Its  benefits  to  the  manu- 
facturers, as  well  as  to  the  consumers,  —  so  far,  at  least,  as  the 
quality  of  salt  is  concerned,  — were  at  once  recognized,  and  are 
clearly  set  forth  in  the  Statistics  of  the  Saginaw  Valley  for  1 868  : 

The  operations  of  this  company  have  been  completely  satisfactory, 
and  the  organization  is  unquestionably  of  great  benefit  to  the  salt  manu- 
facturers who  have  availed  themselves  of  the  advantages  it  offers.  It 
has,  so  far  as  its  line  of  operations  has  extended,  brought  about  the  one 
thing  needful,  a  uniform  system  of  inspection,  and  introduced  system, 
order  and  reliability  into  a  business,  which,  without  such  general  regula- 
tions, has  in  no  quarter  ever  proved  remunerative. 

In  spite  of  the  competition  of  New  York  and  the  Ohio  river 
(relieved  in  part  by  an  agreement  with  the  Onondaga  Salt  Com- 


THE   MICHIGAN   SALT  ASSOCIATION  5 

pany  which  will  be  considered  later),  the  business  grew  with 
remarkable  rapidity,  and  the  association  ran  smoothly  till  1871, 
when  the  vigorous  efforts  of  some  of  the  members  opposed  to 
the  management  became  of  serious  moment.  The  real  merits 
of  the  controversy,  which  became  bitterly  personal,  several  letters 
of  a  violently  abusive  character  being  published,  it  is  hard  to 
determine.  On  the  one  side,  charges  of  mismanagement,  even 
of  dishonest  practices,  were  made  against  the  officers  of  the 
association  by  Duncan  Stewart,  president  of  a  salt  manufactur- 
ing company ;  on  the  other,  Stewart's  dissatisfaction  was  said 
to  have  been  caused  by  the  refusal  of  the  managers  to  ship  salt 
by  a  line  of  boats  in  which  he  was  interested,  at  rates  above 
those  offered  them  elsewhere.  For  our  purpose  it  is  enough  to 
know  the  result.  In  the  Annual  Statement  of  the  business  of 
the  Saginaw  valley  for  1871,  we  find  it  in  compact  form: 

In  salt,  the  season  of  '71  may  be  quoted  as  of  extra  activity  both  in 
manufacture  and  sale.  Early  in  the  season  it  became  evident  that  a 
commercial  rivalry  had  been  excited  which  could  not  end  but  by  the 
going  to  the  wall  of  one  of  the  parties  engaged  in  it.  Assuming  the 
shape  of  individual  antagonism  to  a  corporate  company,  it  became  at  an 
early  day  evident  that  many  of  the  manufacturers  who  are  members  of 
the  Salt  association,  would  take  sides  with  the  opponents  of  the  associa- 
tion, and  as  a  result  fully  one-fifth  of  the  entire  salt  product  of  the  valley, 
which  under  ordinary  circumstances  would  have  been  handled  by  the 
association,  was  purchased  by  the  firm  of  J.  L.  Hurd  &  Co.,  of  Detroit, 
at  prices  in  advance  of  those  realized  by  those  who  remained  in  the  as- 
sociation. Since  the  close  of  navigation,  the  association  has  resolved  to 
suspend  operations  for  the  present,  and  each  manufacturer  will,  during 
the  season,  be  left  free  to  realize  as  best  he  may  on  his  products. 

It  is  significant,  and  somewhat  surprising  to  note  that  by  the 
determined  efforts  of  one  man,  the  association  was  forced  to  sus- 
pend operations,  even  though,  as  has  been  reported,  this  man  was 
compelled  to  destroy  his  own  financial  standing  to  bring  about 
such  a  result.  Table  I,  again,  furnishes  us  with  an  interesting 
comment  upon  this  financial  battle.  For  1872  the  production 
of  salt  in  the  state  is  more  than  3600  barrels  less  than  that  of  the 
year  preceding;  whereas  both  1871  and  1873  show  a  gain  of 
about  100,000  barrels. 


6  TRUSTS,   POOLS  AND   CORPORATIONS 

Five  years  passed  before  a  thoroughly  effective  union  could 
again  be  made.  Smaller  organizations  were  formed  to  sell  salt 
for  groups  of  manufacturers,  notably  the  Saginaw  Salt  Associa- 
tion and  the  Michigan  Salt  Association;  but  the  competition 
was  fierce,  prices  went  steadily  down,  and  the  weaker  companies 
found  themselves  in  need.  At  length,  after  low  and  declining 
prices  throughout  the  year  1875,  the  time  seemed  ripe  for 
another  organization  which  could  control  the  sale  of  a  large 
proportion  of  the  Michigan  salt,  and  through  this  added  power 
of  union  both  secure  a  saving  in  the  expenses  of  sale  and  trans- 
portation, and  either  compete  more  effectively  with  the  New 
York  and  Ohio  river  manufacturers  or  force  them  into  a  union 
which  should  control  the  whole  American  product.  January  8, 
1876,  J.  E.  Shaw,  president  of  the  Michigan  Salt  Association  (a 
smaller  combination  of  manufacturers),  issued  a  circular  address 
to  the  salt  manufacturers  of  Michigan,  calling  a  meeting  to  be 
held  at  Bay  City,  January  20,  to  effect  such  an  organization,  if  it 
should  be  possible.  The  address  exhibits  in  an  almost  pitiable 
light  the  situation  of  the  manufacturers,  and  urges  strongly  the 
need  of  organization.     Mr.  Shaw  declared  : 

The  old  adage,  "  in  union  there  is  strength,"  is  true  wherever  you 
apply  it,  and  in  manufacture  of  salt  there  is  no  exception.  To  secure 
this  union  with  its  attendant  strength  is  the  object  of  the  Michigan  asso- 
ciation. This  is  the  object  it  had  in  view  when  it  was  organized,  and 
this  is  the  object  it  has  in  view  to-day.  That  the  organization  has  re- 
mained inactive,  is  attributable  to  the  fact  that  it  could  not  secure  con- 
trol of  a  sufficiently  large  percentage  of  the  state  product  to  warrant 
[aggressive  action],  a  few  manufacturers  declining,  for  reasons  best 
known  to  themselves,  to  enter  the  association.  And  what  was  the  result? 
Salt  has  depreciated  in  value,  dropped  steadily  down,  until  to-day  it  has 
no  market  price  on  the  Saginaw  river,  and  is  quoted  at  only  $1.27  in 
Chicago,  and  $1.00  in  Toledo.  That  the  experience  of  '75  will  be  that 
of  each  succeeding  year,  unless  something  is  done  to  check  the  general 
demoralization,  cannot  be  gainsaid.  The  oldest  manufacturers  of  the 
Syracuse,  Kanawha,  and  Ohio  districts,  tell  us  that  their  experience,  dat- 
ing back  forty  years  in  some  cases,  has  always  been  this  :  "  Organized 
we  have  prospered.  Unorganized  7ve  have  not."  This  is  the  experience 
which  we  have  been  buying  and  paying  dearly  for.  .  .  .  The  trouble  lies 
in  the  marketing  of  the   product.     Each  man  has  taken  care  of  (or 


THE    MICHIGAN    SALT   ASSOCIATION  7 

attempted  to)  his  own  product.  .  .  .  The  other  salt  di^fficts  of  the 
United  States  are  now  organized,  and  are  ready  to  treat  with  us  (as  soon 
as  we  have  an  association)  relative  to  fixing  and  maintaining  prices, 
dividing  the  territory,  and  making  other  arrangements  which  will  inure 
to  the  advantage  of  the  trade.  But  we  must  first  be  organized.  They 
cannot  treat  with  individuals. 

The  appeal  was  successful.  The  meeting  was  held ;  others 
followed ;  and  in  April  the  Saginaw  Salt  Company  and  the 
Michigan  Salt  Association  were  consoHdated  and  other  outside 
firms  were  taken  in,  so  that  from  the  beginning  more  than  85 
per  cent  of  the  product  of  the  state  was  controlled.  The  new 
association  took  the  name  of  The  Michigan  Salt  Association. 

When  in  1881  the  association  expired  by  limitation,  it  was 
immediately  reorganized  under  the  name  of  The  Salt  Associa- 
tion of  Michigan  ;  and,  in  1886,  again  expiring  by  limitation,  it 
was  again  organized  under  its  former  name.  The  three  associa- 
tions have  been,  in  fact,  the  same  association  under  different 
names;  the  president  and  secretary  elected  in  1876  still  hold 
their  offices,  and  the  business  is  conducted  on  the  same  prin- 
ciples, slight  changes  only  having  been  made  in  the  articles  of 
association  and  by-laws. 

The  organization  of  the  association,  effective  as  it  is,  is  very 
simple.  Less  than  a  page  contains  the  articles  of  association, 
which  declare  that  the  purpose  of  the  association  is  "  the  manufac- 
ture and  deahng  in  salt,"  and  the  "transportation  of  its  products 
to  market  "  ;  that  the  amount  of  capital  stock  shall  be  ^200,000, 
divided  into  $25  shares,  of  which  the  amount  actually  paid  in 
is  two  dollars  per  share ;  that  its  affairs  shall  be  managed  by  a 
board  of  nineteen  directors  (of  whom  not  more  than  one  shall 
be  from  the  same  firm  or  company  of  manufacturers)  chosen  by 
the  stockholders ;  that  the  offices  for  transaction  of  business 
shall  be  in  East  Saginaw  and  Bay  City,  and  that  the  business 
shall  be  carried  on  in  the  salt-manufacturing  counties ;  and, 
finally,  that  the  association  shall  exist  as  a  corporation  for  the 
period  of  five  years. 

From  the  by-laws,  we  learn  that  the  stockholders  shall  be 
manufacturers  of  salt,  and  that  the  number  of  shares  taken  by 
any  one  "  shall  not  exceed  one  share  of  the  capital  stock  for 


8  TRUSTS,   POOLS   AND   CORPORATIONS 

every  barrel  of  the  average  daily  capacity  of  his  manufactory  on 
a  fair  estimate  "  —  an  excellent  provision  to  prevent  manipulation 
of  stock  to  the  detriment  of  the  real  business. 

An  annual  dividend  of  seven  per  cent  payable  semi-annually 
on  the  amount  of  stock  actually  paid  in,  together  with  the  losses, 
costs  and  expenses  incurred  in  handling  and  selling,  including 
the  state  inspection  fees,  is  deducted  from  the  proceeds  of  sales 
before  division  is  made. 

That  the  business  management  of  the  association  may  be  as 
personal  and  direct  as  possible,  the  president  is  given  the  gen- 
eral supervision  of  the  entire  business,  subject  to  the  general 
rules  laid  down  by  the  board  and  the  executive  committee.  A 
secretary  and  a  treasurer  with  the  usual  duties  of  such  officers 
are  appointed  by  the  board,  and  also  an  executive  committee, 
which  has  general  control  and  is  charged  with  the  duty  of  audit- 
ing all  accounts,  inspecting  all  books,  etc.,  at  least  once  a  month. 
The  officers  receive  a  stipulated  salary.  The  organization,  it 
will  be  seen,  is  such  that  the  executive  efficiency  of  a  single 
head  is  combined  with  all  proper  checks  to  guard  against  any 
abuse  of  trust  on  the  part  of  any  of  the  officers.  The  fact  that 
the  chief  officers  of  the  association  have  held  their  positions 
since  its  organization,  and  the  continued  prosperity  of  the  asso- 
ciation, never  greater  than  now,  reflect  the  greatest  credit  on 
the  management  as  well  as  on  the  authors  of  the  plan. 

The  relations  of  the  association  with  the  members,  however, 
constitute  the  main  point  of  interest.  A  contract  is  made  every 
year  with  each  manufacturer  who  wishes  to  become  a  member, 
in  accordance  with  Article  vii  of  the  by-laws,  which  reads  as 
follows : 

Every  manufacturer,  in  becoming  a  member  of  this  association,  shall 
execute  and  deliver  to  it  a  contract  for  all  salt  manufactured  by  him  or 
them,  or  a  lease  of  his  salt-manufacturing  property,  including  all  appa- 
ratus and  appurtenances  thereunto  belonging,  for  the  purpose  of  manu- 
facturing. Such  contract  or  lease  shall  be  for  the  term  of  one  year,  or 
until  the  dissolution  of  the  association,  and  shall  not  impose  any  restric- 
tion that  will  prevent  the  manufacture  of  salt  at  any  and  all  times. 

Each  and  every  contractor  shall  manufacture  salt  for  this  association 
on  the  terms  and  conditions  as  follows  : 


THE   MICHIGAN   SALT  ASSOCIATION  9 

That  he  will  make  salt  solely  on  the  association's  accoum,  of  the  best 
quality  of  the  kind  manufactured  by  him,  according  to  the  conditions 
of  his  contract  or  lease. 

The  contracts  provide,  further,  that  in  case  the  manufacturer 
sells  salt  on  private  account,  he  shall  pay  to  the  association  ten 
cents  for  every  barrel  so  sold  ;  that  the  contract,  however,  is  not 
thereby  forfeited,  but  remains  in  force  throughout  the  stipulated 
time. 

While  this  gives  full  control  of  the  product  to  the  association, 
and  effectually  prevents  all  competition  among  the  manufac- 
turers, the  provision  that  no  restriction  shall  be  imposed  which 
will  prevent  the  manufacture  of  salt  at  any  and  all  times,  oper- 
ates powerfully  against  any  raising  of  prices  to  exorbitant  rates 
such  as  might  perhaps  be  secured  otherwise,  if  combination  with 
the  New  York  and  Ohio  river  manufacturers  could  be  effected. 
The  reason  that  this  clause  stands  in  the  by-laws,  and  that  the 
practice  of  the  association  differs  so  entirely,  on  this  point,  from 
that  of  the  anthracite  coal  syndicate  and  other  combinations  of 
like  character,  is  found  in  the  peculiarity  of  the  manufacture. 
A  great  part  of  the  larger  salt  blocks  are  run  in  connection  with 
saw-mills ;  and  the  slabs,  sawdust,  etc.,  from  the  mills  are  used 
for  barrels  and  fuel.  Not  only  would  this  material,  if  not  so 
used,  be  a  dead  loss,  but  its  removal  would  be  a  source  of  ex- 
pense. Manufacturers  so  situated  could  never  expect  a  rise  in 
the  price  of  salt  sufficient  to  compensate  them  for  the  loss  that 
would  be  incurred  in  stopping  their  works ;  and  consequently 
they  will  not  join  the  association  unless  assured  that  they  will 
not  be  subjected  to  such  a  loss  and  inconvenience  in  their  more 
important  business. 

Another  provision  of  great  advantage,  especially  to  the  manu- 
facturer of  comparatively  small  capital,  is  that  which  provides 
for  an  advance  of  money  on  all  the  salt  inspected  each  month, 
whether  the  salt  is  taken  from  the  bins  and  sold  or  not,  if  the 
manufacturer  wishes  such  advance  and  is  willing  to  pay  interest 
on  it.  The  rate  of  advance  and  the  rate  of  interest  arc  fixed  by 
the  board  and  may  be  changed  from  time  to  time  ;  but  liberality 
is  always  shown  both  in  the  amount  advanced  and  in  the  rate  of 


lO  TRUSTS,   POOLS  AND   CORPORATIONS 

interest.  The  advance  has  been  lately  25  cents  per  barrel  in  the 
bins,  or  45  cents  per  barrel  if  packed,  with  interest  at  7  per  cent. 
Money  may  be  loaned  in  the  state  at  10  per  cent,  and  this  rate 
is  often  obtained  on  small  sums  for  short  periods  of  time. 

The  salt  becomes  the  property  of  the  association  as  soon  as 
inspected ;  but  the  manufacturer  is  still  bound  to  deliver  it  free 
of  charge  on  the  wharf  or  on  the  cars,  as  the  association  shall 
direct,  and  to  sustain  all  losses  by  fire  or  otherwise,  if  they 
occur  before  such  delivery.  The  association  agrees  on  its  part 
to  remove  within  a  reasonable  time  all  the  salt  manufactured. 

Reports  are  rendered  every  month  to  each  member  of  the 
association,  giving  not  merely  his  own  special  account,  but  all 
the  sales,  with  the  average  price  both  gross  and  net,  and  all  the 
necessary  expenses  with  principal  items  —  average  freight,  com- 
mission, home  and  storage  charges,  etc.  All  the  members  receive 
credit  at  the  same  average  rate,  and  for  an  amount  proportioned 
to  their  manufacture  as  shown  by  the  inspection  —  a  provision 
greatly  to  the  advantage  of  the  poorly  situated  companies.  The 
receipts  of  salt  for  each  month  are  sold  and  accounted  for 
separately. 

The  association  keeps  its  agents  —  most  of  them  selling  on 
commission,  but  some  on  salaries  —  in  Chicago,  St.  Louis,  Cin- 
cinnati, Cleveland,  Columbus,  Duluth,  Detroit,  Milwaukee  and 
other  places,  wherever  this  is  warranted  by  the  amount  taken. 

It  will  perhaps  be  well,  further,  to  notice  some  attempts  that 
have  been  made,  since  the  manufacture  of  salt  in  Michigan 
became  a  leading  industry,  to  form  combinations  of  all  the  lead- 
ing manufacturers  in  the  country,  and  thereby  to  secure  from 
consumers  a  price  limited  only  by  the  competition  of  foreign 
salt  and  the  lessened  demand  consequent  on  the  rise  in  price. 

Not  many  months  after  the  Saginaw  and  Bay  association  was 
formed  (April,  1868),  the  managers  began  negotiations  with  the 
manufacturers  in  New  York  and  in  the  Ohio  river  district.  This 
first  attempt,  instead  of  resulting  as  had  been  hoped,  led,  from  a 
rather  pecuhar  combination  of  circumstances,  to  an  even  fiercer 
competition  than  had  existed  before. 

The  president  of  the  association  gives  the  facts  in  his  report 
of  1870  to  the  board  of  directors.     The  association  in  Michigan 


THE    MICHIGAN    SALT   ASSOCIATION  il 

succeeded  in  making  terms  with  the  Onondaga  Salt  Company, 
but  failed  with  the  Ohio  river  association,  because  the  latter 
could  not  control  the  product  of  their  district  either  as  to  quan- 
tity or  price.  Some  new  works  at  Pomeroy,  it  seemed,  had 
refused  to  join  the  Ohio  river  association.  The  other  manu- 
facturers of  that  district,  having  sold  all  their  product  to  the 
association  at  a  fixed  price,  increased  their  output  and  flooded 
the  market.  As  the  association  could  not  control  the  works  at 
Pomeroy,  there  was  a  general  cutting  of  prices  in  which,  of 
course,  Michigan  and  New  York  were  compelled  to  join.  As 
the  eloquent  writer  puts  it :  "  It  was  a  Donnybrook  Fair  in  the 
salt  market.  When  you  saw  a  head,  you  hit  it."  The  imme- 
diate result  was,  naturally,  detrimental  to  all  the  works.  The 
final  outcome  was  that  the  outsiders  on  the  Ohio  river  joined  the 
association,  and  a  change  in  the  character  of  the  contract  with 
the  former  members  enabled  that  association  to  control  the 
quantity  as  well  as  the  price  in  that  quarter.  This  being  done, 
it  became  an  easy  matter  to  make  the  combination  general. 
The  Washington  correspondent  of  The  Chicago  Tribune  gave  an 
account  of  the  pool  which  is  corroborated  by  other  papers  and 
by  officers  of  the  present  Michigan  association.  The  Syracuse, 
the  Ohio,  and  the  Saginaw  and  Bay  companies  entered  into  an 
agreement  at  Detroit,  March  22,  1871, 

To  make  a  pool  of  all  the  salt  in  the  market  in  the  territory  bounded  by 
the  lakes  on  the  North  and  East  and  by  the  Ohio  river  on  the  South,  the 
western  and  southwestern  boundary  to  be  entirely  discretionary,  accord- 
ing to  the  prices  of  freights  to  places  whence  orders  for  this  article  might 
be  sent.  This  discretion  was  confided  in  a  board,  there  appointed, 
which  consisted  of  one  representative  from  each  of  the  three  salt  cor- 
porations, who  are  also  empowered  to  fill  orders  and  forward  all  supplies, 
to  advance  or  reduce  prices  as  occasion  may  require.  The  percentage 
of  the  pool,  and  all  future  supphes  and  profits  under  existing  arrange- 
ments, were  agreed  to  as  follows  :  Syracuse,  40  per  cent ;  Ohio  river,  32 
per  cent ;  Saginaw,  28  per  cent.^ 

The  prices  fixed  were  $2.00  per  barrel  for  Chicago,  Cincin- 
nati, Cleveland  and  Detroit;  $2.10  for  Toledo;  and  $2.40  for 
St.  Louis. 

1  The  Chicago  Tribune,  April  4,  187 1. 


12  TRUSTS,   POOLS  AND   CORPORATIONS 

Reference  to  Table  II  (see  page  15)  will  show  the  effect  of 
the  "  Donnybrook  Fair  "  period,  as  well  as  the  rise  in  price  con- 
sequent on  the  pool  in  1871.  The  Chicago  prices  of  the  first  of 
January  show  the  effects  of  both  movements,  as  do  also  the 
average  prices  at  Saginaw.  Gold  prices  show  a  less  decrease, 
but  emphasize  the  rise  in  187 1-2.  At  the  close  of  1 871,  as  we 
have  seen,  the  Saginaw  and  Bay  association,  having  lost  con- 
trol of  a  large  proportion  of  the  Michigan  men,  could  not 
uphold  their  end  of  the  bargain.  As  they  were  not  bound, 
however,  to  take  at  a  fixed  price  any  large  product,  no  such 
immediate  cutting  of  prices  followed  as  had  been  seen  the  year 
before. 

A  somewhat  more  firmly  controlled  pool  was  made  ten  years 
later  to  cover  about  the  same  territory.  A  special  arrangement 
was  made  with  the  Ohio  river  manufacturers,  the  exact  terms 
of  which  cannot  be  given  ;  but  they  are  of  little  consequence, 
since  by  far  the  larger  part  of  the  amount  was  sold  by  the 
other  companies. 

The  territory  covered  was  bounded  on  the  east  by  a  line 
drawn  north  and  south  through  Buffalo,  and  on  the  south  by  the 
Ohio  river,  as  before.  The  importance  of  the  Michigan  product, 
relatively  speaking,  is  worthy  of  special  notice.  In  1871,  as  we 
have  seen,  Michigan  put  in  28  per  cent;  Ohio  river,  32  per 
cent;  and  New  York,  40  per  cent.  In  1881,  Michigan  put  in 
If  and  New  York  j^y,  while  some  special  arrangement  regarding 
a  small  fixed  number  of  barrels,  or  a  fixed  rate,  was  made  with 
the  Ohio  company.  The  management  of  the  pool,  as  before, 
was  confided  to  a  committee  selected  from  both  companies. 
The  contract  went  into  effect  May  i,  1881,  and  was  terminated 
March  i,  1882,  a  month's  notice  having  been  given  by  the  Mich- 
igan association  in  accordance  with  the  terms  of  the  contract. 
The  effect  of  the  pool  on  prices  is  shown  in  Table  III  (page  16). 
The  cause  for  the  breaking  of  the  pool,  and  the  following  sudden 
lowering  of  prices,  is  stated  by  the  managers  of  the  association 
to  be  simply  that  the  markets,  especially  Chicago,  had  become 
overstocked  with  salt,  and  the  Michigan  association  felt  the 
need  of  having  full  control  there.  They  broke  the  pool,  and 
"  slaughtered  the  market." 


THE    MICHIGAN    SALT   ASSOCIATION  13 

Though  other  combinations  have  been  talked  of -at  times,  no 
other  has  been  made. 

Such,  in  brief,  is  the  history  and  the  plan  of  organization  of 
The  Michigan  Salt  Association.  It  remains  to  consider  some- 
what more  fully  its  economic  effects. 

First,  much  credit  must  be  given  the  association  for  the 
improvement  of  the  quality  of  the  salt  manufactured  in  the 
state.  The  necessity  for  a  rigid  system  of  inspection  to  keep 
up  the  quahty  of  the  product  and  prevent  injury  to  the  reputa 
tion  of  Saginaw  salt  in  the  market,  led  the  old  Saginaw  and  Bay 
Salt  association  to  appoint  a  committee  in  1868  to  draft  a  law 
meeting  the  wants  of  the  salt  manufacturers.  As  early  as  1865 
a  system  of  local  inspection  had  been  adopted  by  a  number  of 
manufacturers,!  but  something  more  rigid  was  required;  and 
this  bill,  which  became  a  law  in  March,  1869,  was  the  result. 
As  amended  in  1875,  it  remains  to-day  in  the  statute  book,  and 
to  it  is  doubtless  due  in  large  measure  the  superior  quality  of 
the  Michigan  salt. 

The  inspector  is  appointed  by  the  governor  and  senate,  is 
paid  a  stated  salary  by  the  state,  and  is,  of  course,  entirely  inde- 
pendent of  the  manufacturers.  The  state  is  divided  into  as  many 
districts  as  seem  to  him  practicable  for  the  thorough  carrying- 
out  of  the  work,  and  all  salt  made  is  carefully  inspected,  a  deputy 
inspector  visiting  each  block  every  day  for  this  purpose.  The 
early  association  deserves  the  credit  of  securing  this  effective 
law.  Some  manufacturers,  it  is  true,  attempt  at  times  to  evade 
the  law  and  to  pass  off  an  inferior  grade  of  salt  for  the  best ;  but 
the  larger  manufacturers,  and  of  course  the  Salt  association,  are 
interested  in  having  the  grade  of  salt  kept  up,  and  therefore 
assist  the  work  of  inspection  as  much  as  possible. 

The  question  which  next  suggests  itself  — that  of  the  influ- 
ence of  the  association  upon  prices  and  profits  —  cannot  be 
answered  so  briefly.  In  many  of  the  markets  it  is  clear  that 
the  association  is  really  without  competition  as  long  as  it  keeps 
its  prices  reasonably  low,  or  perhaps  we  had  better  say,  only 
moderately  high.  The  effective  competition  of  New  York  — 
or  even  that  of  any  Michigan  manufacturers  who  are  "  running 

1  S.  S.  Garrigues,  Saline  Interests  of  Michigan,  p.  32. 


14  TRUSTS,    POOLS   AND   CORPORATIONS 

wild"  —  is  practically  out  of  the  question.  It  must  not  be  for- 
gotten that  the  average  cost  of  manufacture  in  Michigan  is 
considerably  less  than  in  New  York ;  and  though  westward- 
bound  freights  are  low,  they  are  still  worthy  of  consideration. 
Of  course  no  single  manufacturer  could  escape  competition  to 
so  great  an  extent,  since  his  neighbors  would  be  his  strongest 
competitors.  Again,  by  means  of  its  thorough  organization  and 
the  daily  reports  sent  to  the  home  office  by  agents  in  all  im- 
portant markets,  the  association  is  able  to  make  sales  not  merely 
more  advantageously  as  regards  price,  but  also  with  a  much 
less  expense  in  the  way  of  commissions,  travel,  number  of 
agents,  etc.  Besides  this,  the  freedom  from  care  and  responsi- 
bility and  the  certainty  that  the  product  is  in  hands  that  will 
make  the  most  of  it,  is  worth  not  a  little  to  the  average  manu- 
facturer. The  last-named  item  alone,  that  of  greater  intelli- 
gence and  knowledge  of  the  market,  should  receive  more 
consideration  than  the  manufacturer  usually  gives  it. 

Another  point  of  advantage  is  this  :  by  means  of  its  large  sales 
and  long  experience,  the  association  can  reduce  losses  from  bad 
debts  to  a  lower  figure  than  could  individual  manufacturers. 

Further,  when  the  sales  are  all  made  from  a  central  point, 
with  a  right  to  deliver  from  any  of  the  manufactories  at  will,  it 
is  clear  that  a  large  saving  in  transportation  can  be  made.  Con- 
tracts will  be  filled  always  from  the  works  most  favorably  situ- 
ated. Vessels  and  cars  can  be  secured  at  such  times  and  places 
as  will  enable  them  to  carry  at  the  lowest  rates.  The  average 
rate  of  freight  is  thereby  much  lessened. 

The  plan  of  advancing  a  large  part  of  the  value  of  the  salt  to 
the  manufacturer  before  the  salt  is  sold,  enables  him  to  carry  on 
his  business  with  less  capital  than  would  be  required  if  he  were 
not  a  member  of  the  association. 

The  first  consideration,  the  abolition  of  competition,  comes 
solely  to  the  benefit  of  the  manufacturer ;  the  others  mentioned 
are  advantages  from  organization  which  lessen  the  cost  of  pro- 
duction, —  including  sales  and  transportation,  —  and  may  benefit 
either  the  manufacturer,  through  greater  profits,  or  the  consumer, 
through  lower  prices,  or  the  benefit  may  be  divided, 

A  study  of  prices  before  the  formation  of  the  association,  and 


THE   MICHIGAN    SALT   ASSOCIATION 


15 


after,  would  seem  to  show  that  while  the  saving  hacl^hicfly  bene- 
fited the  manufacturer,  as  was  to  be  expected,  the  consumer  had 
not  suffered  seriously. 


TABLE   II 

Price  of  Salt  per  Barrel 

IN  Saginaw  and 

Chicago 

Year 

Saginaw 

Chicago 

Year 

Saginaw 

Chicago 

i860,  January  i, 

$1.50 

1875,  average, 

^I.IO 

1861,  Jan.  I, 

1.75  @  2.00 

1876,  Jan.  I, 

$1-35 

1862,  Jan.  I, 

2.25 

1876,  average, 

1.05 

1863,  Jan.  I, 

2.25 

1877,  Jan.  I, 

1.40 

1864,  Jan.  I, 

2.IO@2.I5 

1877,  average, 

.85 

1865,  Jan.  I, 

2.75 

1878,  Jan.  I, 

1. 10 

1866,  Jan.  I, 

2.35  @  2.40 

1878,  average. 

.84 

1866,  average. 

$1.80 

1879,  Jan.  I, 

1. 10 

1867,  Jan.  I, 

2.40  @  2.45 

1879,  average. 

1.02 

1867,  average, 

1-77 

1S80,  Jan.  I, 

1.45 

1868,  Jan.  I, 

3-25 

1880,  average. 

•75 

1868,  average, 

1.S5 

1881,  Jan.  I, 

1.05 

1869,  Jan.  I, 

2.60 

1 88 1,  average. 

.831 

1869,  average, 

1.58 

1882,  Jan.  I, 

1-35 

1870,  Jan.  I, 

2.25  ©2.30 

1S82,  average. 

,70 

1870,  average, 

1.32 

1883,  Jan.  I, 

1. 00 

1871,  Jan.  I, 

2.05  @  2.10 

1883,  average. 

.81 

1 87 1,  average, 

1.46 

1884,  Jan.  I, 

I-I5 

1872,  Jan.  I, 

2.35  @  2.40 

1884,  average, 

•75f 

1872,  average. 

1.46 

1885,  Jan.  I, 

•95 

1873,  Jan.  I, 

2.40 

1885,  average. 

.70 

1873,  average. 

1-37 

1886,  Jan.  I, 

•95 

1874,  Jan.  I, 

1.90 

1886,  average, 

.66 

1874,  average. 

1. 19 

1887,  Jan.  I, 

.80 

1875,  Jan.  I, 

1.65 

1887,  average. 

■Sll 

Table  II  shows  that,  while  the  prices  have  on  the  whole 
tended  downward  since  1876,  the  time  of  the  formation  of  the 
association,  the  rate  of  decrease  has  been  somewhat  less  rapid. 
On  the  other  hand  it  must  be  noted  that  the  prices  in  the  earlier 
years  are  reckoned  in  legal  tender  notes.  This  causes  the  prices 
during  the  sixties,  and  the  rate  of  decrease  during  the  years  pre- 
ceding resumption,  to  appear  greater  than  they  really  were, 
though  a  sHght  check  in  the  rate  of  decrease  can  be  seen  even 
when  prices  are  reckoned  in  gold.  The  influence  of  the  war, 
too,  in  pushing  the  price  to  what  was  really  an  abnormal  height, 
must  not  be  overlooked.     The  improved  methods  of  manufac- 


i6 


TRUSTS,   POOLS  AND   CORPORATIONS 


ture  would  naturally  cause  a  lowering  of  price,  and  it  is  impos- 
sible to  accurately  judge  the  influence  of  all  the  factors.  The 
earlier  prices,  of  course,  were  not  determined  to  any  marked 
extent  by  the  Michigan  product,  as  the  manufacture  in  the  state 
began  in  i860,  and  was  not  really  on  an  even  footing  with  New 
York  for  several  years.  It  seems  probable,  however,  that  the 
association  checked  somewhat  the  tendency  toward  a  lower  price, 
and,  if  so,  the  consumer  is  so  much  the  worse  off.  This  differ- 
ence in  price  cannot  on  the  whole  have  been  much,  the  chief 
advantage  to  the  manufacturer  coming,  probably,  from  the  les- 
sened cost  of  putting  his  product  on  the  market. 

It  is,  again,  quite  probable  that  without  the  association,  the 
larger  dealers  would  take  part  of  the  profit  which  now  goes  to 
the  manufacturer,  and  that  the  consumer  would  be  forced  to 
pay  as  much  as  now,  and  even  more.  Certain  it  is  that  large 
dealers  in  Chicago,  Toledo,  Cleveland  and  Sandusky  express 
themselves  generally  as  opposed  to  any  association,  even  when 
they  have  been  appointed  agents.  At  present  they  receive  a 
low  commission  per  barrel  of  salt  sold ;  whereas,  before  the 
formation  of  the  association,  they  could  buy  salt  in  the  summer 
months  when  it  was  very  plentiful,  and  store  it  till  after  the 
close  of  navigation,  and  then  the  few  larger  dealers  in  such  an 
important  market  as  Chicago,  by  uniting,  could  advance  the 
price  enough  to  reap  a  handsome  profit.  This  practice,  which 
was  common,  came  to  the  benefit  of  the  few  dealers,  while 
neither  the  manufacturer  nor  the  consumer  received  any  share. 

TABLE  III 
Association  Price  of  Salt  each  Month,  from  June,  1877,  to  November,  1887  ^ 


June  1877 

^0.801 

Feb.  I 

July     " 

•     -79 

March 

Aug.     " 

•72J 

April 

Sept.    " 

.74i 

May 

Oct.      " 

•74 

June 

Nov.     " 

•75 

July 

Dec.     " 

.80 

Aug. 

Jan.   1878 

•73 

Sept. 

Feb.  1878 70 

71 

76 

,     ...     .75 

77 

77 

76 

7c 


Oct.  1878 70 

Nov.     "    * 70 

Dec.     " 70 

Jan.    1879 72 

Feb.      " 80 

March" 83 

April    " 82 

May      " 80 


^  Prices  given  are  for  the  sales  of  the  preceding  month. 


THE   MICHIGAN    SALT   ASSOCIATION 


17 


TABLE   III— Cojilinued 


June  1879 
July  - 
Aug.  " 
Sept.  «' 
Oct.  " 
Nov.  " 
Dec.  " 
Jan.  18S0 
Feb.  " 
March  " 
April  " 
May  " 
June  " 
July  " 
Aug.  " 
Sept.  " 
Oct.  " 
Nov.  " 
Dec.  " 
Jan.  1881 
Feb.  " 
March  " 
April  " 
May  " 
June  " 
July  " 
Aug.  " 
Sept.  " 
Oct.  " 
Nov.  " 
Dec.  " 
Jan.  1S82 
Feb.  " 
March  " 


80 
86 
88 
90 

94 
02 

05 
05 
08 

09 
05 
85 
72 

72 

72 
72 

72 
72 
72 

74 
77 
77 
76 
76 

76^ 
81I 

s^ 

92J 

94 

95 

95 

94 

99 

99 


April  1882     ....     .71 


.72 
.70 
.70 
.70 
.69 
.69 
.69 
.70 


May  "  .  , 

June  "  .  . 

July  "  .  . 

Aug.  "    •  .  . 

Sept.  "  .  . 

Oct.  "  .  . 

Nov.  " 

Dec.  "  .  . 

Jan.   1883 70 

Feb.  "  .  . 

March "  .  . 

April  "  .  . 

May  "  •  . 

June  "  .  . 

July  "  .  . 

Aug.  "  .  . 

Sept.  "  .  . 

Oct.  "  .  . 

Nov.  "  .  . 

Dec.  "  .  . 

Jan.    1884  ,  . 

Feb.  "  .  , 

March "  .  . 

April  "  .  . 

May  "  .  . 

June  "  .  . 

July  "  .  . 

Aug.  "  .  . 

Sept.  "  .  . 

Oct.  "  .  . 

Nov.  "  .  . 

Dec.  "  .  . 

Jan.   1885  .  . 


.70 
.70 
.70 

'75 
.So 
.80 
.80 
.80 
.81 
.83 
.83 
•83 
•83 
.83 
.83 
.80 

•74 

.72 

•71 

.70 
.70 
.70 
.69 


Feb.  1885 69 


March  " 

April 

May 

June 

July 

Aug. 

Sept. 

Oct. 

Nov. 

Dec. 

Jan.    18S6 71 


.68 
.66 

.63 
.62 
.60 
.60 
.65 
.70 
.72 
•73 


Feb.      "  ... 

March  "  ... 

April    "  ... 

May      "  ... 

June     "  ... 
July     "... 

Aug.     "  ... 

Sept.     "  ... 

Oct.      "  ... 

Nov.     *'  ... 

Dec.     "  ... 

Jan.    1SS7 60 


.72 

•71 
.70 
.69 
.68 
.66 

•65 
.65 

•63 
.60 
.60 


Feb. 

March 

April 

May 

June 

July 

Aug. 

Sept. 

Oct. 

Nov. 


.60 
•57 
•55 
•55 
•53 
•51 
•57 
•58 
.60 
.62 


Table  III,  giving  the  average  monthly  prices  of  the  associa- 
tion (the  net  prices  paid  to  manufacturers),  shows,  on  the  whole, 
a  decline;  but  one  not  so  great  after  all,  when  one  considers 
the  general  tendency  of  prices  of  all  manufactured  products. 
Moreover,  there  are  several  times  when  the  price  has  gone  up 
enough  to  counterbalance  in  great  part  the  decline. 

Besides  the  statements  of  reliable  manufacturers  regarding 
their  profits,  a  comparison  of  the  table  of  prices  with  the  table 
showing  the  amount  produced  in  different  years  in  Michigan 


1 8  TRUSTS,   POOLS  AND   CORPORATIONS 

gives  us  still  further  reason  for  the  belief  that  the  association 
cannot  secure  prices  which  make  the  profits  at  all  extraordinary. 
A  distinctly  marked  rate  of  increase  (not  absolute  increase)  or 
faUing  off  in  production  usually  follows,  especially  in  later 
years,  like  changes  in  the  average  yearly  price.  One  should 
not  lay  too  much  stress,  howevet,  upon  such  similarities,  as 
there  are  many  other  determining  factors. 

Many  of  the  advantages  to  manufacturers  of  such  an  associa- 
tion, especially  the  freedom  from  competition  with  one's  neigh- 
bors, cannot  be  secured  unless' a  very  large  proportion  of  the 
manufacturers  of  the  state  are  united.  The  association  aims, 
of  course,  to  have  as  many  join  as  possible;  and  in  case  of 
necessity  it  does  not  hesitate  to  "squeeze"  a  manufacturer 
whose  block  is  so  situated  that  he  has  no  need  of  the  associa- 
tion, and  whose  competition  is  troublesome.  This  brings  to 
our  notice  the  disadvantage  it  might  be  to  some  manufacturers 
to  become  members.  As  the  prices,  freight  charges,  etc.,  are 
arranged  for  the  whole  association,  the  manufacturer  who  has 
a  ready  market  near  at  hand  could  oftentimes  reaUze  somewhat 
more  by  remaining  outside. 

In  the  year  1886,  about  600,000  barrels  of  Michigan  salt 
were  sold  by  outsiders.  The  amount  was  large  enough  to 
make  a  real  competition  that  could  be  severely  felt  by  the 
association.  At  length,  the  managers  issued  the  order  to  their 
agents  to  meet  any  rates,  however  low  they  might  run.  Table 
III  shows  the  gradual  decrease,  as  the  fight  went  on.  In 
August,  1887,  the  unprecedentedly  low  price  of  50  cents  per 
barrel  was  reached.  In  the  same  month  manufacturers  repre- 
senting some  350,000  to  400,000  barrels,  yearly  product,  joined 
the  association ;  and  we  note  the  consequence  in  the  rise  of 
price  to  57  cents  for  that  month's  product,  while  the  prices  for 
the  following  three  months  (58,  60,  and  62  cents)  still  show  the 
upward  tendency. 

It  has  been  impossible  to  obtain  with  any  degree  of  accuracy 
the  data  which  would  indicate  the  influence  of  the  competition 
within  the  state ;  namely,  the  times  of  the  accession  of  different 
manufacturers  to  the  association  and  of  their  withdrawal  from  it. 
As  the  contracts  are  made  yearly,  some  enter  the  association 


THE   MICHIGAN   SALT  ASSOCIATION  19 

and  others  leave  it  every  year.  In  one  or  two  instfmces,  how- 
ever, the  effect  of  such  changes  is  marked.  Reference  to  Table  - 
III  shows,  in  1880,  a  sudden  decline  in  price  from  $1.09  to  72 
cents  within  three  months.  This  is  probably  to  be  explained  by 
the  fact  that  "  a  large  number  of  the  manufacturers  went  out 
March  i,  and  that  they  commenced  cutting  prices,  and  we  [the 
association]  concluded  to  more  than  meet  them."  ^  The  sudden 
drop  in  prices  in  the  early  part  of  1882  followed  the  breaking  of 
the  pool  with  New  York.  The  rise  in  August,  1887,  is  due,  as 
noted  above,  to  the  accession  of  a  number  of  manufacturers. 
It  should  rather  be  called  the  setting  back  of  the  price  toward 
that  obtained  before  the  cutting  to  force  the  manufacturers  in. 
Doubtless,  too,  many  of  the  other  changes  noticed  are  to  be 
ascribed  to  the  same  causes. 

When  a  barrel  containing  280  lbs.  of  fine  salt  of  the  first 
quality  can  be  bought  in  the  Chicago  market  at  a  price  ranging 
from  75  to  85  cents,  there  is  not  likely  to  be  very  much  com- 
plaint on  the  part  of  consumers,  nor  much  talk  about  "  monop- 
olies," "coalitions  for  robbing  the  people,"  etc.;  and  yet  the 
Michigan  Salt  Association  is  sometimes  attacked  as  a  monopoly, 
and  it  doubtless  has  some  of  the  features  of  one.  Adolph 
Wagner  is  strongly  inclined  to  recommend  the  manufacture  of 
salt  by  the  state,  on  account  of  the  danger  of  so  common  an 
article  of  consumption  being  monopolized  by  the  manufacturers 
and  dealers.2  The  advisability  of  state  control  seems  to  him, 
on  the  whole,  greater  than  in  the  case  of  the  coal  industry. 
Our  experience  with  anthracite  coal  companies  within  the  past 
few  years  has  been  such  that  we  may  well  note  the  circum- 
stances of  our  salt  industry  in  this  regard.  Is  it  hkely  or  even 
possible  that  a  really  oppressive  monopoly  in  this  article  can 
be  made .'' 

The  salt-producing  territory  of  the  United  States,  while  wide- 
spread, is  nevertheless  so  limited  that  competition  in  manufacture 
is  by  no  means  so  free  as  in  other  hues  where  the  raw  material 
may  be  shipped  in  at  low  rates;  e.g.  cotton,  or  shoes.  This 
makes  it  much  easier  for  two  or  three  combinations  to  unite 

^  Letter  from  the  secretary  of  the  association. 

2  Wagner,  Finanzwissenschaft,  Bd.  I,  §§  251,  254. 


20  TRUSTS,   POOLS  AND   CORPORATIONS 

and  control  the  whole  product ;  and  we  have  seen  that  in  two 
instances,  at  least,  for  short  times,  such  a  union  was  made  to 
control  "  disputed  territory  "  ■ — an  expression,  by  the  way,  which 
in  itself  emphasizes  the  limited  nature  of  the  competition. 

The  coal  and  petroleum  industries  have  been  able  to  secure 
complete  control  by  the  aid  of  the  railways.  Aside  from  the 
fact  that  the  capital  invested  in  salt  is  much  smaller,  it  would  be 
much  more  difficult  for  the  associations  to  control  the  means  of 
transportation.  The  territory  is  more  widely  scattered,  and.  is, 
besides,  much  of  it  adjacent  to  the  great  lakes.  Such  a  control 
as  the  coal  syndicates  exercise,  would  require  a  controlling  influ- 
ence over  all  the  larger  railways  east  of  the  Mississippi,  and 
over  the  boats  on  lakes  Huron,  Michigan  and  Erie,  as  well. 

A  further  matter  to  be  noted  is  the  large  import  of  salt.  In 
1880  some  38  per  cent  of  all  the  salt  used  in  the  United  States 
came  from  abroad.  Though  part  of  this  is  of  a  different  quahty 
and  does  not  enter  into  competition  with  the  American  product, 
yet  a  large  part  of  the  sea-board  traffic  in  salt,  and  the  larger 
part  of  the  salt  used  in  the  South,  is  controlled  by  the  importers. 
The  salt  is  brought  as  ballast,  so  that  the  cost  of  transportation 
to  our  coast  is  practically  nothing.  It  is  the  cost  of  transporta- 
tion from  the  sea-board  that  keeps  it  out  of  the  territory  now 
controlled  by  the  Michigan  association.  It  may  be  readily  seen 
that  our  protective  tariff  on  salt  would  need  to  be  far  higher 
than  at  present,  before  our  manufacturers,  even  if  all  in  the 
United  States  were  united,  could  command  prices  comparable, 
when  considered  with  reference  to  the  cost  of  production,  to 
those  obtained  on  anthracite  coal.  The  character  of  the  com- 
binations, too,  would  need  to  be  much  stricter. 

Without  such  combinations,  considering  the  Michigan  asso- 
ciation as  it  is,  the  New  York  competition  is  enough  to  keep 
the  price  from  becoming  exorbitant.  Add  to  this  the  above- 
mentioned  fact  that  the  association  has  no  power  to  limit  pro- 
duction, and  the  fact  that  new  wells  are  being  sunk  continually, 
whose  owners  can  be  forced  to  join  the  association,  if  inclined 
to  remain  outside,  only  by  a  tedious  and  expensive  fight  on 
prices,  and  the  dangers  to  consumers  from  the  a:ssociation  seem 
slight.     Doubtless,  the  manufacturers  who  have  been  in  effect 


THE    MICHIGAN    SALT   ASSOCIATION  21 

forced  into  it,  and  who  feel  that  without  an  assocktion  in  the 
state  more  profit  could  be  made,  are  inclined  to  think  that  such 
a  combination  is  oppressive.  These  manufacturers,  however, 
form  but  a  small  proportion  of  those  in  the  state. 

The  conclusion  to  which  one  must  come,  then,  regarding  the 
influence  of  the  association  is  this  :  it  is  probable  that  the  average 
consumer  is  but  slightly  affected,  though  it  is  possible  that  he 
has  to  pay  a  little  more  for  his  salt  than  would  otherwise  be  the 
case;  it  is  certain  that,  with  the  exception  of  a  few  who  are 
uncommonly  well  situated,  the  manufacturers  are  decidedly 
benefited  by  the  association.  Certain  it  is  that  most  of  them 
are  well  content,  and  that  the  association  never  stood  firmer 
than  it  does  to-day,  j   ^y  j^^^^^ 

The  subsequent  history  of  combination  in  this  industry  has  been  unfortu- 
nate. The  National  Salt  Company  was  organized  in  New  Jersey  in  1899, 
acquiring  the  business  of  a  company  of  the  same  name  chartered  by  West 
Virginia.  Most  of  its,  properties  were  in  New  York,  but  the  company  pur- 
chased the  best  plants  in  Ohio  and  Michigan,  claiming  in  1900  to  include  94 
per  cent  of  the  evaporated  salt  of  the  entire  country  excepting  the  Pacific 
coast.  In  1900  plans  for  controlling  salt  works  in  Spain  and  Italy  were 
inaugurated. 

The  next  step  was  the  formation  of  a  New  Jersey  company  in  1901,  known 
as  the  International  Salt  Company,  which  absorbed  the  National  by  inter- 
change of  securities.  This  operation  was  financially  tainted  by  the  enormous 
compensation,  amounting  to  about  one  third  of  the  stock  of  the  new  company, 
issued  to  the  promoters.  By  1902  also  it  became  clear  that  the  National  Salt 
Company,  which  had  been  paying  dividends  at  8  per  cent  on  the  common  stock, 
was  practically  insolvent,  not  even  having  earned  interest  on  its  bonds.  It 
was  officially  stated  that  this  embarrassment  was  due  more  to  extravagant 
purchases  of  plants  than  to  losses  in  operation.  Meanwhile  disorganization 
and  losses  of  property  under  receivership  has  greatly  reduced  the  proportion 
of  the  entire  industry  controlled.  In  so  far  as  the  possession  of  natural  salt 
deposits  constitutes  a  basis  for  monopoly,  a  foundation  for  successful  com- 
bination would  seem  to  be  present ;  but  failure  has  evidently  resulted  hitherto 
from  a  combination  of  extravagance,  mismanagement  and  perhaps  even  down- 
right fraud.  —  Ed. 

Note.  The  admirable  account  of  the  later  salt  combinations  in  A.  S,  Dewing, 
Corporate  Promotions  and  Reorganizations,  Harvard  Economic  Studies,  1914,  chapter 
VIII,  brings  experience  down  to  date. 


II 

THE   DEVELOPMENT    OF   THE    WHISKEY    TRUST  i 

IT  is  probably  too  soon  to  tell  with  even  a  reasonable  degree  of 
certainty  what  the  outcome  of  the  present  tendency  towards 
combination  among  producers  is  to  be.  So  far  there  have  been 
not  a  few  egregious  failures,  the  most  noteworthy  being  the 
collapse  of  the  copper  syndicate  —  though  that  was  hardly  a 
trust,  technically  speaking ;  but  there  have  been  also  a  few 
apparently  noteworthy  successes.  It  seems  clear,  at  any  rate, 
that  we  have  still  some  time  to  wait  before  we  can  say  what  the 
resulting  normal  is  to  be ;  and  in  the  meantime  it  seems  best 
not  to  be  too  hasty  in  exterminatory  legislation,  in  sweeping 
denunciation  nor  in  unqualified  praise,  but  to  study  as  accu- 
rately as  is  possible  the  history,  management  and  tendency  of 
the  individual  organizations,  that  when  the  time  for  action  comes 
we  may  act  with  knowledge.  The  present  article  is  an  attempt 
to  describe,  as  accurately  and  fully  as  the  information  that  can 
be  secured  will  permit,  one  of  the  (apparently,  at  least)  most 
successful  of  these  organizations  :  "  The  Whiskey  Trust  "  ;  more 
accurately  :  "  The  Distillers'  and  Cattle-Feeders'  Trust."  The 
significance  and  tendency  of  such  an  organization  as  this  cannot 
be  understood  without  a  knowledge  of  the  circumstances  leading 
to  its  formation.  In  this  case,  interest  is  added  by  the  fact  that 
legislation  by  the  United  States  and  by  some  European  nations 
is,  doubtless,  indirectly  responsible  in  good  part  for  the  condition 
of  business  that  led  to  the  formation  of  the  trust. 

It  is  well  known  that,  from  the  establishment  of  our  govern- 
ment till  the  outbreak  of  the  Civil  war,  distilled  spirits  were  for 
the  most  part  comparatively  free  from  taxation  by  the  United 
States.     The  tax  levied  by  the  recommendation  of  Alexander 

1  Abridged  from  the  Political  Science  Quarterly,  Vol.  IV,  1889,  pp.  296-319.  For 
additional  references,  see  footnote  on  p.  45  infra. 


THE   DEVELOPMENT   OF   THE   WHISKEY   TRUST      23 

Hamilton,  which  led  to  the  Whiskey  insurrectioja^n  Western 
Pennsylvania,  was  comparatively  very  light  (only  9  to  11  cents 
per  proof  gallon,  as  compared  with  90  cents  at  present),  and 
even  this  was  repealed  soon  after  the  accession  of  Jefferson 
to  the  presidency.  From  that  time,  with  the  exception  of  four 
years  (from  18 13,  when  an  increase  of  revenue  was  necessary 
to  carry  on  the  war,  till  18 17),  spirits  were  free  until  the  out- 
break of  the  Rebellion.  As  a  consequence,  they  were  sold  at 
a  very  low  price,  —  24  cents  on  the  average  in  New  York  for 
the  five  years  preceding  1862,  with  a  minimum  price  of  14  cents 
per  proof  gallon,  —  and  there  was  little  temptation  to  over- 
production for  either  the  home  or  foreign  market. 

At  the  outbreak  of  the  Rebellion  the  necessity  for  increased 
revenue  that  led  to  the  imposition  of  internal  taxes  wherever 
it  was  thought  that  a  revenue  could  be  raised,  "without  much 
regard  to  acknowledged  politico-economic  laws  or  precedents,"  ^ 
resulted,  of  course  very  properly,  in  the  taxation  of  distilled 
spirits.  The  first  tax  of  20  cents  a  proof  gallon  (July  i,  1862) 
was  followed,  March  7,  1864,  by  an  act  raising  the  tax  to  60 
cents  per  gallon.  July  i  of  the  same  year  the  rate  went  to 
$1.50;  and  January  i,  1865,  to  ^2.00  per  gallon. 

At  each  increase  of  the  tax,  considerable  time  intervened 
before  the  highest  rate  was  imposed.  As  a  natural  conse- 
quence, distilleries  were  run  to  their  utmost  capacity,  and  even 
new  distilleries  were  built  to  get  a  stock  on  hand.^  As  Mr. 
H.  B.  Miller,  the  president  of  the  whiskey  pools,  writes: 

Some  time  intervened  before  the  various  amounts  were  collected,  and 
during  this  time  the  distiller  and  speculator  had  nearly  the  whole  benefit 
of  the  tax  without  paying  it.  The  speculation  in  whiskey  during  this 
time  was  tremendous.  Editors,  ministers,  statesmen,  —  all  took  a  hand. 
Distilleries  were  erected  all  over  the  country,  and  at  the  end  of  the  war 
there  was  three  times  the  capacity  that  could  be  utilized. 

^  Reports  of  United  States  Revenue  Commission,  1865-66,  p.  2. 

2  Ibid.  p.  6:  "Thus,  for  example,  the  commission  estimate  that  on  the  ist  of  July, 
1864,  the  date  when  the  advance  in  the  tax  on  distilled  spirits  of  from  60  cents  to 
$1.50  per  gallon  took  effect,  there  were  made  and  stored,  in  anticipation  of  this 
advance,  at  least  forty  millions  of  gallons,  or  a  quantity  sufficient  to  supply  the  wants 
of  the  country  for  at  least  a  year  in  advance." 


24  TRUSTS,   POOLS   AND   CORPORATIONS 

To  the  same  effect  David  A.  Wells,  in  the  article  on 
"  Distilled  Spirits "  in  Lalor's  Cyclopedia  of  Political  Science, 
writes : 

The  immediate  effect  of  the  enactment  of  the  first  three  and  succes- 
sive rates  of  excise  was  to  cause  an  almost  entire  suspension  of  the 
business  of  distilling,  which  was  resumed  again  with  great  activity  as 
soon  as  an  advance  in  the  rate  of  tax  in  each  instance  became  probable. 
The  stock  of  whiskey  and  high  wines  accumulated  in  the  country  under 
this  course  of  procedure  was  without  precedent ;  and  Congress,  by  its 
refusal  to  make  the  advance  in  taxation,  in  any  instance,  retroactive, 
virtually  legislated  for  the  benefit  of  distillers  and  speculators  rather  than 
for  the  treasury  and  the  government.  The  profits  realized  by  the  holders 
of  stocks,  thus  made  in  anticipation  of  the  advance  in  taxation,  has 
])robably  no  parallel  in  the  history  of  any  similar  speculation  or  commer- 
cial transactions  in  this  country,  and  cannot  be  estimated  at  less  than 
$50,000,000. 

When  the  period  of  speculation  was  over,  the  great  amount  of 
surplus  capacity  for  manufacture  and  the  large  amounts  of  stored 
products  on  hand  made  it,  of  course,  almost  or  quite  impossible 
for  distillers  who  did  not  practise  frauds  on  the  revenue  to  con- 
tinue in  business.  The  high  taxes,  however,  led  to  such  frauds 
that  whiskey  often  sold  in  the  market  for  less  than  the  amount 
of  the  tax. 

Another  factor  that  contributed  to  the  general  depression  was 
the  lessened  demand  for  alcohol  for  use  in  the  arts  and  manu- 
facture. With  alcohol  at  30  or  40  cents  a  gallon,  it  was  used  in 
large  quantities  for  the  manufacture  of  burning  fluid,  varnishes, 
furniture  polish,  perfumeries,  patent  medicines,  even  as  fuel  for 
cooking,  etc. ;  the  United  States  revenue  commission  estimating 
that  in  i860  not  less  than  25,000,000  gallons  of  proof  spirits 
were  so  used.  When  the  tax  was  $1.50  and  $2.00,  or  even  50 
cents,  as  it  was  from  1868  to  1872,  spirits,  of  course,  became 
too  expensive  for  such  purposes.  As  the  tax  has  been  still 
higher  since  that  date  (70  cents  till  1875,  and  90  cents  since 
that  time),  no  increased  demand  for  such  purposes  has  been 
felt. 

These  causes,  including  the  large  amounts  fraudulently  manu- 
factured in  the  earlier  years  of  the  high  taxes,  had  tended  to 


THE    DEVELOPMENT   OF  THE   WHISKEY   TRUST      25 

keep  the  distilling  business  in  a  comparatively  depjiessed  con- 
dition after  the  speculative  period  following  the  war  had  passed. 
Even  as  early  as  1870  or  1871  the  distillers  felt  themselves  com- 
pelled to  enter  into  an  agreement  to  limit  their  distilleries  to 
two-fifths  production ;  and  all  north  of  the  Ohio,  with  two  or 
three  exceptions,  made  such  an  agreement.  No  very  decisive 
effect,  however,  was  produced  by  this  arrangement.  The  facili- 
ties for  manufacturing  adapted  themselves  gradually  to  the 
demand  ;  and,  on  account  of  our  cheap  grain,  a  fair  export  trade 
was  growing  up  that  relieved  the  situation  somewhat.  But  in 
the  years  from  1878  to  1882,  on  account  of  successive  crop 
failures  in  Europe,  a  very  heavy  export  demand  at  paying 
prices  sprang  up.  In  1879,  1880,  and  1881,  nearly  16,000,000 
gallons  a  year  were  exported. 

TABLE  I 

SriRITS   REMOVED    IN   BOND   FOR   EXPORT  ^ 


Taxable 

Percentage 

Taxable 

Percentage 

Year 

(proof)  gallons 

OF  PRO- 

Year 

(proof)  GALLONS 

OF  PRO- 

EXPORTED 

DUCTION 

EXPORTED 

DUCTION 

1873      •      •      • 

2,358,630 

3-45  + 

1881    .      .      . 

15,921,482 

13.524- 

1874 

4,060,160 

5.90  + 

18S2    . 

8,092,725 

7.64  + 

1875 

587,413 

0.96  + 

1883    . 

5,326,427 

7-19  + 

1876 

1,308,900 

2.25-f 

1884    . 

9,586,738 

12.70-1- 

1877 

2,529,528 

4.22  + 

18S5    . 

10,671,118 

14.24  + 

1878 

5,499,252 

9-80  + 

1 886   . 

5,646,656 

7.024- 

1879 

14,837,581 

20.63 -t- 

1887   . 

2,223,913 

2.85  + 

1880 

16,765,666 

18.55  + 

1888   . 

1,514,205 

2.154- 

To  meet  this  demand  many  new  distilleries,  including  some  of 
the  largest  in  the  country,  were  built,  while  the  old  ones,  of 
course,  were  run  at  full  capacity.  After  1880,  good  crops  in 
Europe,  poor  crops  at  home,  with  some  changes  in  the  tariff 
laws  2  of  leading  European  countries,  especially  discriminating 
duties  against  the  United  States,  cut  off  this  demand,  and  left 


1  Report  of  the  Commissioner  of  Internal  Revenue,  1888. 

2  Rene  Stourm,  L'Impot  sur  I'akool  dans  les  principaux  pays,  p.  48. 


26  TRUSTS,   POOLS  AND   CORPORATIONS 

the  distilleries  of  this  country  with  a  capacity  sufficient  to  pro- 
duce four  times  what  the  home  market  needed. ^ 

Of  course,  there  was,  at  first,  great  over-production,  and  con- 
sequent distress  among  distillers.  They  could  not  export  except 
at  a  loss ;  their  cattle  were  in  the  barns  (the  feeding  of  cattle 
on  the  slop  from  the  distilleries  is  one  important  adjunct  to  the 
distilling  business),  so  that  it  was  difficult  to  close  the  distilleries; 
their  warehouses  were  filled  with  goods,  and  the  market  was 
broken.     Something  must  be  done. 

Some  said  :  Let  this  go  on  and  let  the  fittest  survive.  Our  experience 
was  that  a  distiller  would  keep  on  until  all  his  own  money  and  all  he 
could  borrow  was  gone,  and  when  he  was  used  up  there  was  another 
man  ready  to  step  in  his  shoes.^ 

In  November,  1881,  a  general  meeting  was  called  to  form  a 
pool.  Prices  were  really  below  the  cost  of  manufacture  in  many 
places,  and  the  only  remedy  seemed  to  be  to  limit  the  output, 
and  to  export  the  surplus,  even  at  losing  prices.  The  "  Western 
Export  Association "  was  formed,  the  officers  of  which  were 
authorized  to  levy  a  monthly  assessment  on  each  distiller  run- 
ning his  distillery.  This  assessment  was  to  be  proportionate  to 
the  amount  of  grain  used  in  manufacture,  and  high  enough  to 
pay  the  losses  arising  from  the  exportation  of  a  quantity  of  spirits 
sufficient  to  relieve  the  home  market. 

An  appeal  was  made  to  Congress,  asking  that  an  export 
bounty  be  given  equal  to  that  granted  by  Germany ;  or,  if  a 
bounty  for  export  should  not  be  given  for  fear  of  lessening  the 
revenue,  that  the  internal  revenue  tax  be  raised  to  $1.00  and 
then  a  bounty  of  10  cents  for  export  be  granted.     Congress  and 

1  In  the  references  to  the  trade,  especially  the  exports,  all  the  manufacturers  of 
whiskey  have  so  far  been  considered.  As  the  whiskey  pools  have  mostly  concerned 
only  one  branch  of  the  business,  and  as  the  trust  is  limited  to  this  branch,  i.e.  the 
manufacturers  of  a  product  for  immediate  use,  it  is  worth  while  to  call  attention  to  the 
distinction.  One  class  of  producers,  especially  those  in  Kentucky,  manufacture 
"  Kentucky  whiskey,"  technically  so  called,  i.e.  a  product  that  needs  to  be  stored  for 
some  time  (from  two  to  five  or  more  years)  before  it  is  in  good  condition  for  use 
(J.  M.  Atherton :  Testimony  before  Committee  on  Manufacture,  p.  3) ;  the  other 
class  of  distillers,  located  mostly  north  of  the  Ohio  river,  manufacture  alcohol,  pure 
neutral  or  cologne  spirits,  etc.,  a  product  that  is  fit  for  immediate  use. 

2  Letter  from  H.  B.  Miller,  former  president  of  the  pool. 


THE    DEVELOPMENT   OF   THE   WHISKEY   TRUST      2/ 

the  people,  however,  had  not  forgotten  the  whiskey-ring  scandal, 
and  consequently  Congress  did  not  dare  legislate  in  favor  of  dis- 
tillers, even  if  such  legislation  should  injure  no  one. 

This  first  pool  lasted  till  May,  1882;  then,  some  members 
refusing  to  pay  their  assessments,  it  broke  up.  The  distillers 
had  been  able  to  keep  prices  somewhat  higher  by  its  means ; 
but  after  the  breaking  of  the  pool,  they  ran  at  low  profits,  many 
of  them  at  a  loss,  or  else  shut  down  during  the  summer  —  a 
proceeding  which  in  itself  involved  of  course  a  decided  loss. 
In  September,  1882,  they  organized  again  for  one  year  on  a 
similar  plan ;  but  it  was  found  necessary  to  make  an  attempt 
to  limit  the  output  of  the  distilleries  to  a  small  percentage 
of  their  capacity,  in  addition  to  the  relief  of  the  market  by 
exporting. 

It  soon  became  evident  that  it  was  cheaper  to  limit  production 
by  paying  some  distilleries  to  suspend  production  entirely,  per- 
mitting the  others  to  work  at  more  nearly  their  full  capacity, 
than  to  limit  all  to  a  fixed  percentage  of  their  normal  production. 

Though  the  Kentucky  product  is  of  a  different  kind  from  that 
manufactured  by  members  of  the  pool,  it  of  course  came  into 
competition  with  the  latter  when  it  had  aged  enough  to  be  put 
upon  the  market.  The  law  allowing  distillers  to  keep  their 
product  in  bond  for  three  years  before  paying  the  tax  had  led 
to  a  heavy  overstocking  in  Kentucky,  and  when  this  stored  prod- 
uct first  began  to  come  upon  the  market,  the  situation  became 
still  more  trying. 

From  1883  till  1887  the  pool  continued  for  a  year  at  a  time, 
with  a  suspension  as  often  as  once  each  year.  Sometimes  the 
better  plan  seemed  to  be  to  limit  the  output  of  the  distilleries, 
leaving  each  distiller  to  attend  to  the  marketing  of  the  product 
himself ;  sometimes  for  the  officers  of  the  pool  themselves  to 
provide  for  the  export  of  any  surplus,  assessing  the  individual 
distillers  the  amount  required  to  pay  any  loss  on  the  export.  In 
the  articles  of  organization  of  the  pool  of  1884,  we  read : 

Only  28  per  cent  of  the  full  capacity  shall  be  operated,  and  no  stock- 
ing up  beyond  this  amount  allowed  under  any  circumstances.  Any 
member  operating  his  house  and  producing  any  kind  of  distilled  spirits 


28  TRUSTS,   POOLS   AND    CORPORATIONS 

must  take  care  of  them  himself.  The  association  is  debarred  from  paying 
any  member  for  maintaining  any  market,  exporting  goods,  or  warehouse- 
ing  them. 

In  spite  of  the  small  percentage  of  capacity  run  during  this 
year,  the  pool  suspended  in  the  spring  of  1885,  though  it  reor- 
ganized again  in  October  of  the  same  year.  At  the  organization 
of  this  pool  (in  1885)  a  committee  reported  : 

It  is  the  sense  of  this  committee  that  no  distillery  shall  be  allowed  to 
run  beyond  40  per  cent.  The  basis  for  market  price  should  be  fixed  at 
the  lowest  possible  figure,  it  being  recognized  by  all  that  high  prices  are 
detrimental  and  difficult  to  maintain. 

Section  12  of  their  articles  of  agreement,  differing  from  those 
of  the  preceding  year,  provides  for  exportation  as  follows: 

To  maintain  prices  at  all  times,  the  officers  shall  cause  to  be  exported 
at  any  time  without  the  United  States  any  surplus  that  may  at  any  time 
appear,  allowing  and  paying  therefor  [such]  a  bonus  as  will  equal  the 
quotation  prices,  and  [shall]  report  all  such  exports,  the  quantity  shipped, 
the  bonus  paid,  etc. 

Section  1 3  further  provided  that  the  president  should  cause  a 
suspension  of  the  association  for  the  following  causes : 

If  a  distiller  runs  more  than  he  is  entitled  to  run ;  if  a  distiller  refuses 
to  exhibit  his  government  book  to  an  authorized  agent ;  if  a  distiller 
refuses  or  neglects  to  make  his  monthly  report  or  refuses  to  accept  his 
draft  or  pay  his  monthly  assessments ;  if  a  distiller  resumes  his  capacity 
and  operates  his  distillery  having  once  sold  it ;  in  case  exported  goods 
are  re-imported  and  placed  upon  the  domestic  market ;  in  case  closed 
houses  are  not  paid  in  full,  and  in  one  payment,  for  each  month,  before 
the  close  of  said  month. 

A  resolution  was  also  passed  providing  that  the  association  be 
suspended  when  any  new  distillery  should  be  built  and  start  to 
run.  Provisions  were  also  made  for  the  examination  of  the 
government  books  of  each  distiller  by  the  officers  of  the  pool, 
in  order  to  prevent  deception  and  cutting  of  rates  on  the  part 
of  any  distiller ;  but  in  spite  of  these  precautions,  and  in  spite 
of  the  high  prices  they  were  able  to  maintain  for  their  goods  in 
the  pool,  it  was  found  that  the  temptations  to  secure  sales  by 


THE   DEVELOPMENT   OF   THE   WHISKEY   TRUST      29 

the  cutting  of  prices  were  so  great  that  members  wj^juld  violate 
the  terms  of  the  agreement.  Within  two  months  after  its  for-  ^ 
mation,  in  caUing  a  meeting  of  the  distillers  whose  houses  were 
running,  in  order  to  determine  the  amount  of  assessments, 
prices  of  goods,  etc.,  the  president  of  the  pool  expresses  clearly 
the  state  of  the  trade.  It  should  be  remembered,  in  consid- 
ering his  words,  that  they  were  written  not  to  influence  legisla- 
tion or  public  opinion,  iDut  that  they  were  addressed  to  men 
directly  concerned,  who  knew  the  circumstances.  Among  other 
things,  he  says  with  reference  to  over-production  and  the  proper 
policy  of  the  pool : 

That  we  shall  over-produce  after  the  holidays  we  all  know  —  we  knew 
it  when  we  organized  in  Chicago  and  for  that  very  reason  made  the 
assessment  12  cents  on  40  per  cent  to  create  an  export  fund.^  That 
we  have  already  over-produced,  figures  will  show.  ...  A  few  more 
days  running  without  a  pool  would  have  wound  you  up,  and  this  over- 
production we  are  not  trying  to  get  rid  of  by  exportation.  You  want  to 
look  these  figures  square  in  the  face ;  and  if  it  takes  more  money  to  do 
our  exporting  than  you  thought,  it  is  occasioned  by  your  own  folly  in 
over-producing  so  heavily  in  September  and  October.  As  long  as  we 
have  funds  to  export  the  surplus  there  will  be  no  difficulty  in  maintain- 
ing prices.  When  goods  accumulate  without  any  outlet,  then  is  the 
time  when  cutting  commences.  ...  It  will  not  do  to  make  the  price 
of  goods  too  high,  for  as  we  raise  the  price  we  must  raise  the  bonus  on 
exports  correspondingly.  .  .  .  There  are  but  two  things  left  for  us  to 
do ;  either  provide  sufficient  means  to  keep  our  warehouses  clear  of  the 
surplus  by  exportation,  or  let  the  market  go  to  pieces  of  its  own  weight. 
I  am  well  convinced  there  is  cutting  going  on  secretly  now,  and  unless 
provision  is  made  at  once  to  arrest  it,  it  will  be  done  openly,  until  there 
is  nothing  left  of  the  market.  Situated  as  we  are,  the  question  is  no 
longer  as  to  making  a  great  amount  of  money,  but  to  prevent  our  suffer- 
ing great  losses.  This  is  the  problem  for  you  to  solve,  and  the  meeting 
is  called  thus  early  as  an  imperative  necessity,  and  all  running  houses 
should  be  present.  Distillers,  when  they  have  an  accumulation  of  goods 
on  hand,  will  not  hesitate  to  cut  prices  one  cent  a  gallon  to  make  a  sale, 
when  they  will  hesitate  to  pay  one-half  cent  a  gallon  to  make  cutting 
minecessary,  even  if  double  the  amount  is  placed  in  their  hands.     Right 

1  That  is  to  say,  12  cents  for  each  bushel  of  capacity  run,  when  the  houses  were 
running  at  40  per  cent  of  their  full  capacity.  The  capacity  of  a  distillery  is  measured 
by  the  number  of  bushels  of  grain  consumed  per  day. 


30  TRUSTS,   POOLS  AND   CORPORATIONS 

here  I  will  repeat  what  I  have  so  often  stated  before,  that  the  amount 
of  the  assessment  does  not  come  out  of  the  distiller,  but  out  of  the  con- 
sumer, the  same  as  the  government  tax,  and  he  [the  distiller]  is  merely 
the  agent  to  collect  and  pay  it  over,  of  course  with  the  quahfication  that 
prices  are  maintained. 

He  closes  a  series  of  statistics  (regarding  the  output  in  com- 
peting states)  with  the  words  : 

I  have  been  particular  in  giving  you  all  the  information  possible,  so 
you  can  act  intelligently  at  the  next  meeting.  The  only  way  to  main- 
tain prices  is  to  get  rid  of  the  surplus  by  exportation.  You  can  fly  in 
the  face  of  Providence  if  you  see  fit,  but  it  will  bring  its  own  punishment 
with  it. 


TABLE  II 

Pool  Assessments,  September,  1884,  to  April,  1S87,  inclusive 


January    . 
February  . 
March 
April    .     . 

May     .  . 

June     .  . 

July  .  . 
August 

September  ^ 

October  . 
November 
December 


1884  1885 

Cents  per  bushel    Cents  per  bushel 
mashed  .        mashed 


12 
12 


(Also  extra  as- 
sessment for  I 
day:  $1  50  per 
bushel.) 


1886  1887 

Cents  per  bushel    Cents  per  gallon 
mashed 


16 

9 
10 
10 

(Extra  assess- 
ment for  I  day: 
35  cents.) 

10 


r  per  bush. 
I  per  gal. 
per  gal. 


^  Assessment  for  September,  1886,  was  2  cents  per  gallon  produced  (equal  to  9 
cents  per  bushel),  and  also  an  assessment  of  2  cents  per  bushel ;  making  a  total  of 
II  cents  per  bushel.  By  multiplying  the  assessment  per  gallon  by  4J,  the  amount  per 
bushel  will  be  obtained  nearly.     About  4^  gallons  of  spirits  are  made  per  bushel  corn. 


THE    DEVELOPMENT   OF   THE   WHISKEY   TRUST      31 

A  pool  seemed  a  necessity ;  but  the  experience  of  this  and 
of  the  following  year  seemed  to  show  that  a  pool  Ciiuld  not  be 
maintained.  The  competition,  there  can  be  no  doubt,  was  for ^ 
many  ruinous,  though  those  best  situated  could  live  and  make 
profits.  The  difificulty  in  maintaining  the  pool,  together  with 
the  effect  of  the  pool  on  prices,  may  be  seen  in  the  fluctuating 
figures  of  Table  III  (page  37).  The  same  movements  are 
illustrated  graphically  in  the  Diagram  (pages  42,  43),  and 
there  the  changes  may  be  more  readily  noted.  Table  II  shows 
the  extent  of  the  assessments  from  September,  1884,  to  the 
time  of  the  formation  of  the  trust.  It  has  not  been  possible  to 
obtain  the  earlier  assessments. 

In  consequence  of  the  competition,  and  in  order  that  a  closer 
organization  might  be  established,  it  was  determined  by  the 
leading  distillers,  in  the  spring  of  1887,  to  organize  a  trust, 
formed  upon  the  model  of  the  Standard  Oil  Trust.  The  "  trust 
agreement,"  pi^blished  in  the  examination  of  the  president  of 
the  trust  before  the  congressional  committee  in  1888,  provides 
that  the  trust  created  shall  be  vested  in  nine  trustees ;  that 
these  trustees,  under  bonds  of  $100,000  each,  shall,  in  accord- 
ance with  section  1 1  : 

.  .  .  exercise  supervision,  so  far  as  their  ownership  of  stocks  enables  them 
to  do,  over  the  several  corporations  or  associations  whose  stock  is  held 
by  said  trustees.  As  stockholders  of  said  corporations  they  shall  elect 
or  endeavor  to  elect  honest  and  competent  men  as  directors  and  officers 
thereof,  who  shall  be  paid  a  reasonable  compensation  for  their  services. 
They  may  elect  themselves  as  such  directors  and  officers,  and  shall 
endeavor  to  secure  such  judicious  and  efficient  management  of  such 
corporations  as  shall  be  most  conducive  to  the  interests  of  the  holders 
of  trust  certificates. 

No  distillery  was  to  be  allowed  to  join  this  trust  except  the 
members  of  the  former  pool ;  but  any  member  of  the  former 
pool,  if  a  corporation,  might  join  upon  the  assignment  of  a 
majority  of  stock  by  the  individual  stockholders  to  these  trus- 
tees. For  the  stock  thus  assigned,  the  trustees  prepared  stock 
certificates,  which  showed  the  interests  of  each  beneficiary  in 
said  trust.     The  certificates  were  divided  into  shares  of  the  par 


32  TRUSTS,   POOLS   AND   CORPORATIONS 

value  of  $100  each,  and  were  known  as  the  "Distillers'  and 
Cattle-feeders'  Trust  certificates."  Any  distillery  not  owned  by 
a  corporation  might  be  re-organized  in  corporate  form  in  order, 
by  the  aforesaid  assignment  of  stock,  to  join  the  trust.  In  accord- 
ance with  section  4  of  the  trust  agreement,  no  certificates  could 
be  issued  except  for  stock,  and  the  par  value  of  the  certificates 
issued  were  to  represent  as  nearly  as  possible  the  actual  cash 
value  of  the  stock  held  by  the  trustees  in  trust.  In  estimating 
the  value  of  the  plants  owned  by  the  different  corporations,  the 
following  elements  were  considered  :  (i)  the  cost  of  the  construc- 
tion of  the  plant ;  (2)  the  amount  of  working  capital  required  for 
its  management,  and  (3)  its  earning  power.  This  last  element, 
of  course,  depends  upon  various  factors,  and  of  necessity  was 
left  largely  to  the  judgment  of  the  committee  appointed.  The 
location  of  the  distillery,  the  skill  of  its  former  managers,  their 
ability  to  secure  a  sale  for  their  product,  and  other  factors  would 
all  need  to  be  considered.  Furthermore,  the  earning  capacity  of 
the  distillery  under  the  management  of  the  trustees,  if  it  should 
be  allowed  to  run,  might  vary  quite  materially  from  its  former 
earning  power.  These  different  considerations  led  the  committee 
to  issue  certificates  for  from  two  to  three  times  the  cash  value  of 
the  plants.  This  has  led  some  of  the  critics  to  state  that  the 
trust  certificates  were  about  two-thirds  water.  A  careful  con- 
sideration of  the  factors  involved  will  enable  the  reader  to  judge 
how  far  this  is  true.^  That  jealousy  among  the  different  corpo- 
rations might  be  avoided,  the  value  placed  upon  the  stock  of 
each  corporation  was  not  made  known  except  to  the  corporation 
immediately  interested  and  to  the  trustees. 

The  trust  was  to  continue  for  twenty-five  years  from  the  date 
of  its  organization,  and  thereafter  until  terminated  by  a  vote  of 
sixty-six  and  two-thirds  per  cent  in  value  of  the  holders  of  cer- 
tificates, at  a  meeting  called  for  that  purpose. 

At  the  first  annual  election  three  trustees  were  to  be  elected 
to  hold  their  office  for  one  year ;  three  to  hold  their  office  for 
two  years,  and  three  for  three  years.  Thereafter  three  trustees 
were  to  be  elected  annually  to  take  the  place  of  those  retiring, 
each  to  hold  his  office  for  three  years,  except  in  case  of  those 

^  See  Testimony  of  J.  B.  Greenhut  before  Committee  of  Manufactures,  pp.  73  et  seq. 


THE    DEVELOPMENT   OF   THE   WHISKEY   TRUST      33 

elected  to  fill  a  vacancy,  who  should  hold  until  the  ex^ation  of 
the  term.  A  person  to  hold  the  ofifice  of  trustee  must  be  the 
actual  owner  of  at  least  500  shares  of  trust  certificates. 

The  meetings  of  the  certificate  holders  take  place  annually, 
and  may  be  called  oftener  at  the  request  of  thirty-three  and 
one-third  per  cent  of  value  of  the  trust  certificates. 

It  is  to  be  noted  that  this  trust  agreement  expressly  provides 
that  the  trustees  are  not  limited  in  their  duties,  as  has  been  often 
suggested,  to  the  receipt  of  dividends  or  interests  upon  the 
stocks  or  moneys  held  in  trust,  and  to  the  division  of  such  divi- 
dends to  the  holders  of  trust  certificates ;  but  they  are  also  to 
elect  competent  men  as  cUrectors  and  officers  of  said  corpora- 
tions represented,  and  are  to  exercise  supervision  over  the 
several  corporations  whose  stock  is  held  by  them  as  trustees. 
Furthermore,  it  is  to  be  noted  that  these  trustees  in  every  case 
hold  a  majority  of  the  stock  in  each  corporation,  so  that  their 
control  over  each  distillery  is  absolute.  A  manager  is  appointed 
by  the  trustees  for  each  distillery,  whose  salary  is  paid  out  of 
the  trust  funds.  This  manager  is,  of  course,  usually  one  of  the 
leading  original  stockholders  and  managers  in  that  distillery. 

In  order  that  the  business  may  be  kept  well  in  hand,  reports 
are  required  daily  from  each  distillery  engaged  in  manufacture ; 
and  each  distillery  that  is  running  sends  in  a  detailed  report 
every  month,  showing  the  exact  cost  of  manufacture  of  the 
product  and  all  other  details  regarding  the  management  of  the 
business.  Again,  by  these  monthly  reports  the  trustees  are 
able,  if  they  wish  to  lessen  or  to  increase  the  amount  produced, 
to  close  the  distilleries  that  are  working  least  successfully  or  to 
open  those  that  furnish  the  best  opportunity  to  supply  any 
special  market.  The  trustees  are  also  at  liberty  to  purchase 
distilleries  that  are  running  outside  of  the  trust,  and  to  lease 
distilleries  managed  by  the  trust,  whenever  in  their  opinion  this 
plan  seems  more  profitable  than  to  operate  them  by  trust  officers. 
In  the  latter  case,  of  course,  the  profits  are  still  held  under  the 
control  of  the  trust. 

This  firm  control  over  the  different  distilleries  enables  the 
trustees  to  control  the  market  by  Hmiting  the  output  of  the 
product   to  the  amount   demanded   rather   than   by  exporting 


34  TRUSTS,   POOLS   AND   CORPORATIONS 

the  surplus  at  a  loss,  as  was  done  under  the  old  pools.  Almost 
no  attempt  has  been  made  by  the  trust  to  gain  control  of  the 
foreign  market,  and  none  of  the  product  has  been  exported  at  a 
loss  since  the  formation  of  the  trust.  Their  comparatively  small 
exports  (see  Table  I,  page  25)  have  been  at  paying  prices. 
A  brief  examination  of  Table  II  (page  30),  which  gives  the 
monthly  assessments  levied  upon  the  members  of  the  old  pool 
(from  6  cents  to  18  cents  per  bushel)  from  September,  1884,  to 
the  formation  of  the  trust  in  May,  1887,  will  show  how  great  a 
saving  has  thus  been  effected. 

Another  saving  is  that  which  comes  from  the  lessened  expenses 
of  management,  resulting  from  the  closing  of  so  many  distilleries. 
Nearly  all  the  distilleries  in  the  former  pool,  to  the  number  of 
more  than  eighty,  have  become  members  of  the  trust.  In  order 
to  limit  the  output  to  the  demands  of  the  market,  these  distilleries, 
if  running  when  they  joined,  have  been  from  time  to  time 
closed,  until  at  the  present  time  twelve  distilleries  supply  the 
total  amount  that  is  placed  by  the  trust  upon  the  market.  One 
or  two  others  are  running,  but  for  the  production  of  yeast,  or 
some  other  product  than  spirits.  It  is  by  no  means  to  be 
assumed  that  the  decrease  in  the  output  corresponds  in  any 
manner  with  the  number  of  distilleries  closed.  When  it  is 
taken  into  consideration  that  for  several  years  the  output  of  the 
distilleries  had  been  often  limited  to  from  25  to  50  per  cent  of 
their  capacity,  many  of  them  even  closing  for  portions  of  the 
year,  it  will  be  seen  that  an  equal  output  might  be  produced  by 
a  much  less  number  of  distilleries.  That  there  has  been  a 
smaller  aggregate  output  is  doubtless  true,  and  that  to  an  extent 
more  than  enough  to  balance  the  lessened  amount  exported. 
The  amount  is  held  in  hand  well  enough,  so  that  the  trust  can 
manage  to  control  the  market. 

An  examination  of  Table  III  (page  37),  which  gives  the  market 
prices  of  corn  and  whiskey  from  the  time  of  the  formation  of  the 
first  pool,  in  188 1,  to  March,  1889,  will  show  that  the  price  of 
alcohol  has  not  been  to  any  noticeable  extent  raised  by  this  clos- 
ing of  the  distilleries.  For  some  six  or  eight  months  after  the 
formation  of  the  trust  the  prices  were  lowered  eight  or  nine  cents 
per  gallon,  although  the  prices  of  corn  ruled  somewhat  higher 


THE   DEVELOPMENT   OF   THE   WHISKEY   TRUST      35 

than  before.  Presumably  the  purpose  of  this  lowating  of  the 
prices  at  first  was  to  bring  pressure  to  bear  upon  the  distilleries  , 
yet  remaining  outside  of  the  trust  in  order  to  force  them  to  join 
the  trust,  or  else  because  in  the  beginning  the  trust  did  not  yet 
have  strength  to  force  the  market.  After  all  or  nearly  all  of  the 
members  of  the  former  pool  had  joined  the  trust,  so  that  its 
membership  was  practically  complete,  and  it  became  evident 
that  a  contest  with  the  distillers  yet  remaining  outside  was  at 
hand,  the  managers  of  the  trust  raised  the  price.  The  new 
members  would  need  dividends  to  keep  them  contented,  and 
there  was  also  a  necessity  of  accumulating  a  fund  upon  which 
to  enter  upon  this  contest  with  their  rivals. 

A  comparison  of  the  prices  of  corn  and  alcohol  for  the  year 
preceding  the  formation  of  the  trust  with  the  prices  from  May, 
1888,  to  January,  1889  (see  Table  III,  or  Diagram),  will  show 
that  the  profits  made  by  the  trust  have  not  been  greater  than 
those  made  by  the  old  pool,  unless  the  cost  of  management  of 
the  distilleries  has. been  much  decreased;  and  yet,  during  this 
period  from  May,  1888,  to  January,  1889,  the  trust  had  put  the 
price  high  enough  to  enable  them  to  pay  good  dividends  to 
members  that  might  otherwise  have  become  dissatisfied  and  to 
accumulate  a  surplus  for  the  purpose  of  a  contest  with  outsiders. 
It  is  from  this  very  evident  that  the  saving  in  cost  of  manage- 
ment and  manufacture  has  been  very  great.  It  must  also  be 
kept  in  mind  that  from  twelve  to  twenty  distilleries  have  been 
earning  these  dividends  on  stock  that  represents  some  eighty- 
three  distilleries.  This  emphasizes  still  more  the  great  saving 
effected  in  expenses. 

The  immediate  result  of  this  increase  in  price  (from  $1.05  to 
$1.09  per  gallon,  and  then  to  $1.14)  was  the  building  of  new 
distilleries,  notably  the  large  distillery  at  St.  Paul ;  the  opening 
of  many  small  distilleries,  and  the  manufacture  of  spirits  by  the 
smaller  distilleries  in  Kentucky,  whose  normal  product  was 
whiskey  for  aging.  When  at  length  it  became  evident  that  the 
distilleries  outside  of  the  trust  were  also  making  a  large  product 
and  the  output  from  these  distilleries  was  beginning  to  have  its 
effect  upon  the  market,  the  trustees,  on  the  ist  day  of  January, 
1889,  again  cut  the  price  of  the  product  to  $1.04  per  gallon,  in 


36  TRUSTS,    POOLS   AND   CORPORATIONS 

order  to  crush  their  opponents.  The  smaller  distilleries  in  Ken- 
tucky and  elsewhere  of  course  closed  promptly,  or  changed  the 
character  of  their  product.  The  most  formidable  rivals  of  the 
trust,  Shufeldt  &  Co.  of  Chicago,  who  had  doubtless  also  made 
large  gains  from  the  increase  in  price  and  who  had  run  their 
distillery  at  even  more  than  its  normal  capacity,  at  once  cut  down 
their  output,  though  they  have  not  closed  and  are  even  building 
a  new  house  of  3000  bushels  capacity. 

What  the  next  move  will  be,  remains  to  be  seen.  It  is  said 
by  the  managers  of  the  trust  that  their  best  poHcy  is  to  hold  the 
price  of  the  product  below  the  cost  of  manufacture  by  most  of 
the  rival  distilleries  and  thus  keep  the  market  steady.  They 
claim  that  they  are  able  to  do  this  from  the  saving  in  manage- 
ment and  from  the  fact  that  they  run  only  the  distilleries  most 
favorably  located.  For  local  trade  they  can  run  those  that  will 
save  freight ;  and,  in  fact,  they  run  one  in  Cincinnati,  one  in  St. 
Louis,  one  in  Kansas  City,  etc.  The  figures  of  the  trust,  gath- 
ered from  the  various  distilleries  under  their  control,  show  that 
the  distilleries  at  Peoria  have  an  advantage  of  from  14  to  15  per 
cent  over  most  of  the  distilleries  located  elsewhere,  so  that  here 
some  six  are  running.  It  is  the  belief  of  distillers  not  members 
of  the  trust,  as  well  as  of  the  trustees,  that  a  Peoria  distillery 
has  at  least  10  per  cent  advantage  over  a  distillery  located  at 
Chicago,  and  nearly  20  per  cent  over  one  located  at  St.  Paul. 
This  claim  seems  to  be  substantiated  by  the  statement  of 
Charles  Clark,  for  many  years  past  a  prominent  distiller  at 
Peoria,  though  not  now  in  the  business  himself.  He  says  that 
at  times  of  great  depression  in  the  business,  during  the  exist- 
ence of  the  former  pools  and  earlier,  his  distillery  made  regu- 
larly 10  per  cent  on  the  running  capital  and  25  per  cent  on  the 
plant,  besides  good  salaries  for  the  managing  members  of  the 
firm.  With  the  exception  of  one  year  this  rate  of  profit  was 
made  for  many  years  prior  to  the  formation  of  the  trust,  and  in 
that  unfortunate  year  there  was  a  clear  profit  of  ^12,000.  Dur- 
ing this  very  time  the  complaints  of  distillers  in  other  parts  of 
the  country  that  money  was  being  lost  and  that  no  interest 
could  be  made  on  their  investments  were  doubtless  often  true. 
On  the  other  hand,  in  estimating  the  ability  of  the  trust  to  com- 


THE   DEVELOPMENT   OF   THE   WHISKEY   TRUST      37 

TABLE  III  "^  ■ 

Market  Prices  at  Peoria  for  Whiskey  and  Corn  from  18S1  to  1888  inclusive 


1881 

18S 

>j 

1883 

1884 

Whiskey 

Corn 

Whiskey 

Corn 

Whiskey 

Corn 

Whiskey 

Corn 

January    .     .     . 

1.15-1.16 

62-59 

1.13-1.14 

445-505 

1.15-1.16 

4 I 5-47 

February 

1.16-1.17 

58^-54 

1.14-1-15 

48-555 

1.16-1.17 

47-42 

March  . 

1. 16 

58|-66i 

LIS 

564-49 

1. 17 

415-48 

April    . 

1. 17 

66J-755 

1. 15 

475-525 

1.17-1.12 

435-505 

May     . 

1.13-1.17 

7S-702 

1. 15 

50-53 

1. 12 

48-54i 

June     . 

1.11-1.15 

72  69,5; 

1. 15 

53-475 

1.08 

50-455 

July      . 

1.11-1.14 

73-755 

1. 15 

48-45 

1. 08-1. 07 

44-49 

August 

1.14-1.16 

745-77 

I-I5 

45-51 

1.05 

475-50.^ 

September 

1.16-1.18 

75-592 

1. 15 

495-46 

I.IO-I.II 

51-45 

October     . 

1.16-1.18 

6i-7oi 

1. 15 

45-474 

I. II 

40-53 

November 

1.11-1.15 

62I-58 

1.14-1.15 

705-67 

1. 15 

465-49 

1.11-1.12 

42-30 

December 

I-I5 

58i-62 

1.13-1.15 

555-45 

I  15 

52-45 

1. 12 

305-35 

1885 

1886 

1887 

1888 

1888 

Month 

Whis- 
key 

Corn 

Whis- 
key 

Corn 

Whis- 
key 

Corn 

Whis- 
key 

Corn 

Whis- 
key 

Corn 

January    .     .     . 

1.12-1.14 

345-40 

1. 10 

33-35 

1. 14 

334-355 

1.09 

484-47 

1.04 

30 

February 

1. 14 

38^-36^ 

1. 10 

34-324 

1. 14 

354-334 

1.09 

47-454 

1.04 

295 

March  . 

1. 14 

374-405 

1. 10 

33-344 

1. 14 

33I-38 

1.09 

454-49 

1.04 

3" 

April     . 

1. 14 

394-475 

1. 10 

334-325 

1. 14 

374-36 

1.09 

474-534 

May      . 

1. 14 

50-45 

1. 10 

33-295 

1. 1 4-1 .05 

37-38.i 

I. 09-1. 13 

52^-575 

June     . 

1. 14 

44-475 

1. 10 

29-31 

I. 05-1. 09  38I-36 

1.13-1.14 

534-462 

July     . 

1. 14 

47-434 

1.10-1.07 

28^-415 

1.05 

384-344 

1. 14 

49-435 

August 

1. 14 

454-425 

1.09-1.11 

402-39 

1.05 

383-424 

1. 14 

454-40 

September 

1.05 

435-405 

1.11-1.13 

38.^36 

1.05 

41 5-39 4 

1. 14 

44-40I 

October    . 

1. 04-1.09 

42.I-38I 

1.13-1.14 

355-325 

1.05 

395-41 4 

1. 14 

394-44 

November 

1.09 

445-32 

1. 14 

334-365 

1.05 

395-46 

1. 14 

42I-38 

December 

1.09-1.10 

335-315 

1. 14 

352-33! 

1.05 

444-495 

1. 14 

335-295 

Average  Yield  per  Bushel 1 


Year 

Yield 

Year 

Yield 

Year 

Yield 

Year 

Yield 

1881 
1882 

3-694 
3-792 

1883 
1884 

3-874 
3-895 

1885 
1886 

4.076 
4-55 

1887 
1888 

4.62 
4-53J 

1  The  average  yield  for  the  last  three  years  is  for  the  Trust  or  Peoria  distilleries. 
The  government  report,  including  all  distilleries,  gives  for  the  years  1886,  '87,  '88, 
respectively,  the  yield  4.09 -f,  4.23 -h,  4.24  +  . 


38  TRUSTS,    POOLS   AND    CORPORATIONS 

pete  with  its  rivals,  it  must  be  remembered  that  fourteen  dis- 
tilleries must  make  profit  enough  to  pay  dividends  on  the  capital 
invested  in  more  than  eighty  distilleries,  a  drawback  amply  suf- 
ficient to  offset  any  slight  benefit  in  the  cost  of  manufacture. 
A  distiller  who  has  no  closed  houses  to  carry,  no  dividends  to 
pay  on  capital  that  is  inactive,  has  certainly  something  of  an 
advantage.  If  the  trust  holds  its  own  firmly,  however,  this 
advantage  will  soon  to  a  great  extent  disappear,  as  the  trust  will 
doubtless,  as  opportunity  offers,  dispose  of  the  useless  closed 
distilleries  and  turn  the  dead  capital  into  profitable  channels. 

The  trust  has,  doubtless,  had  some  benefit  from  the  fact  that 
dealers  would  fear  to  incur  the  hostility  of  so  powerful  an  organ- 
ization by  purchasing  from  its  rivals.  This  is  again  offset  in 
part,  by  the  popularity  of  certain  brands  of  whiskey  (though 
this  would  apply  especially  to  the  Kentucky  product)  the  manu- 
facturer of  which  can  always  be  sure  of  his  market.  It  is  prob- 
able, at  any  rate,  that  the  advantage  is  not  so  decidedly  with 
the  trust  that  it  can  totally  crush  out  all  competition,  though 
this  can  be  determined  more  certainly  after  a  year  or  two.  At 
present  it  manufactures  only  from  80  to  85  per  cent  of  the  total 
product  in  the  market,  and  its  rivals  are  preparing  to  compete 
still  more  vigorously.  Shufeldt  &  Co.  of  Chicago,  as  has  been 
said,  are  building  a  new  distillery,  and  there  are  reports  that 
others  in  Illinois  are  soon  to  be  built.  The  trust  cannot  afford 
to  buy  out  all  distilleries  that  may  be  built.  If  it  is  to  succeed, 
it  must  keep  its  prices  so  low  that  new  distilleries  will  not  be 
built.  Its  action  in  pushing  up  the  price  last  year,  if  a  merely 
temporary  expedient  to  accumulate  a  fund,  was  perhaps  a  wise 
move  from  the  standpoint  of  the  trust ;  but  such  prices,  quoted 
too  often,  would  not  be  of  advantage.  The  trust  must  succeed 
by  underselling  its  rivals,  not  by  buying  them  out.  This  is 
evidently,  too,  the  policy  of  the  organization ;  for  it  is  a  rule 
that  no  distilling  company  not  in  the  old  pool  can  join  the 
trust.  Even  those  companies  have  not  been  coaxed  in  by  too 
large  offers,  as  is  sometimes  asserted.  The  assertion  made  in 
the  New  York  Evening  Post  of  January  2,  1889,  by  the  agent 
of  Shufeldt  &  Co.,  that  the  trust  had  tried  in  many  ways  to 
force  that  firm  into  union,  and  had  even  offered  it  ^1,000,000  in 


THE   DEVELOPMENT   OF   THE   WHISKEY  TRUST      39 

cash  to  join  the  orjjjanization  is,  even  if  correctly  re^ported,  not 
true.  Both  the  trust  officers  and  Shufeldt  &  Co.  deny  it. 
Doubtless  the  trust  would  be  glad  to  be  joined  by  so  important 
a  rival ;  and  it  is  conceded  by  members  of  the  trust  that,  had 
the  company  joined  them  when  the  trust  was  organized,  its 
managers  could  have  had  much  influence  in  the  new  organiza- 
tion. The  implication  is  that  they  might  have  had  a  trustee. 
It  is  worth  while  to  give  this  much  of  the  case,  because  it  shows 
the  position  the  trust  has  taken  regarding  perhaps  its  most 
formidable  rival,  and  the  course  it  must  pursue  if  it  is  to  suc- 
ceed. It  must  meet  its  competitors  in  fair  business  rivalry 
and  be  able  to  control  by  low  prices  the  larger  part  of  the 
sales. 

As  much  is  said  regarding  the  influence  of  trusts  and  combi- 
nations of  all  kinds  on  wages  and  prices  of  materials,  it  may  be 
worth  while  to  mention  the  statements  on  this  subject  furnished 
by  the  president  of  the  trust  to  the  congressional  committee. 
The  coopers  that  manufacture  barrels  for  the  distilleries  and 
the  miners  that  furnish  coal  both  testify  that  the  distilleries  con- 
nected with  the  trust  voluntarily  raised  the  prices  for  barrels 
and  coal  so  that  fair  wages  could  be  paid.  Before  the  organi- 
zation of  the  trust  such  a  rise  in  prices  could  not  be  given  on 
account  of  the  fierce  competition,  and  even  after  its  formation 
distilleries  not  connected  with  the  trust  held  the  miners  to  their 
former  oppressively  low  contracts,  instead  of  following  the  ex- 
ample of  the  trust.  The  president  of  the  trust  adds  that  while 
they  "do  not  wish  to  take  the  position  as  posing  before  the  pub- 
lic as  benefactors  to  any  extent,"  yet  they  do  believe  in  "the 
principle  of  intelligent  cooperation,"  and  as  they  can  afford  to 
pay  good  wages  they  are  willing  in  justice  and  fairness  so  to  do. 

Most  of  the  advocates  of  trusts  and  pools  claim  that  one  of 
the  chief  advantages  to  come  from  them  is  stability  of  prices. 
An  examination  of  Table  III,  or  better,  of  the  Diagram,  will 
show  that  while  the  fluctuations  are  somewhat  less  frequent 
under  such  a  regime,  yet,  when  a  fall  or  rise  in  price  does  come, 
it  is  sudden,  and  is  apt  to  be  a  change  of  considerable  extent. 
It  is  very  questionable  if  there  is  any  gain  from  such  a  policy. 
The  lack  of  stability  under  the  old  pool  was  due,  it  was  claimed, 


40  TRUSTS,   POOLS   AND   CORPORATIONS 

to  the  instability  of  the  pool  itself  ;  but  so  far  matters  have 
been  little  better  in  this  respect  under  the  trust.  One  thing 
seems  better  under  the  trust :  the  trust  itself  has  stability,  and 
seems  to  have  power ;  it  may  steady  prices  if  it  will  put  them 
somewhat  low  and  be  satisfied  with  moderate  steady  returns, 
instead  of  striving  for  great  gains  interspersed  with  very  small 
ones.  The  future  will  determine  what  is  to  be  its  policy.  The 
managers  of  the  trust  say  that  the  policy  of  the  trust  is  to  secure 
steady,  moderate  gains ;  others  who  are  interested  question  this. 
The  system  of  high  gains  alternating  with  low  ones,  if  pursued 
as  a  regular  policy,  would  do  much  to  justify  the  distrust  of  the 
public  and  would  take  away  the  only  ground  on  which  such 
combinations  can  fairly  be  justified :  low,  steady  prices. 

A  sufficiently  accurate  estimate  of  the  real  benefits  accruing 
to  the  various  distilleries  from  their  association  in  the  trust  may 
be  obtained  from  an  examination  of  the  dividends  paid  by  the 
trust  since  its  formation,  and  from  the  value  of  the  trust  certifi- 
cates. Although  the  trust  was  organized  in  June,  1887,  many 
of  the  distillers  belonging  to  the  old  pool  had  not  been  received 
into  the  trust  until  about  the  beginning  of  the  following  year; 
so  that  any  dividends  paid  before  January,  1888,  cannot  be  con- 
sidered fair  tests  of  the  management  or  of  the  success  of  the 
trust.  From  January,  1888,  to  July,  1888,  inclusive,  a  dividend 
of  one-half  of  one  per  cent  per  month  was  paid ;  for  August 
the  dividend  decreased  to  one-fourth  of  one  per  cent ;  and  from 
September  till  January,  1889,  inclusive,  dividends  of  one-third 
of  one  per  cent  per  month  were  declared.  The  dividend  for 
February,  1889,  again  decreased  to  one-fourth  of  one  per  cent, 
owing  doubtless  to  the  late  cut  in  price.  It  must  be  borne  in 
mind,  also,  that  in  addition  to  the  dividends  throughout  the  year 
1888,  a  surplus  was  being  accumulated  to  carry  on  the  contest 
with  outside  distillers.  It  was  said  by  some  members  of  the 
trust,  when  the  trust  certificates  were  valued  at  30,  that  they 
then  represented  about  the  actual  cash  value  of  the  plant.  If 
this  be  accepted  as  an  accurate  estimate,  and  it  is  doubtless  not 
far  from  the  truth,  we  can  readily  see  that  the  trust  has  paid 
dividends,  during  somewhat  more  than  one  year  of  active  exist- 
ence, of  more  than  12  per  cent  per  annum. 


THE   DEVELOPMENT   OF  THE   WHISKEY  TRUST      41 


TABLE   IV 

Quotations  of  Market  Value  of  Distillers'  and  Cattle-feeders' 
Trust  Certificates 


18S8. 


March 

I. 

5°- 

1SS8. 

Aug. 

28. 

43- 

1889. 

Jan.      15. 

30- 

14. 

48. 

Sept. 

7- 

40. 

31- 

31- 

April 

I. 

45^. 

19. 

39j- 

Feb.        9. 

32. 

20. 

42.^. 

Oct. 

10. 

36^ 

18. 

33- 

May 

II. 

45|. 

20. 

35i. 

March    4. 

34- 

June 

4- 

43. 

Nov. 

13- 

39- 

7- 

35- 

18. 

40. 

21. 

39. 

13- 

36 

July 

2. 

41. 

Dec. 

12. 

35. 

20. 

35 

7- 

44. 

21. 

33- 

April      I. 

34 

24. 

45- 

1SS9. 

Jan. 

4- 

33- 

6. 

34. 

Aug. 

13- 

42. 

An  examination  of  Table  IV,  which  gives  the  value  of  trust 
certificates  for  each  month  from  March,  1888,  to  the  present 
time,  will  lead  us  to  about  the  same  conclusion.  As  soon  as  it 
became  evident  that  the  trust  was  firmly  established  and  bade 
fair  to  be  a  success,  some  small  sales  of  certificates  were  made 
to  enthusiastic  buyers  as  high  as  65  ;  others  among  distillers  at 
55  ;  but  no  real  market  for  trust  certificates  was  established 
above  50.  With  some  slight  variations  the  value  has  slowly 
decreased,  until  in  January,  1889,  the  lowest  value  (30)  was 
reached,  since  which  time  a  slight  increase  in  value  is  to  be 
noted.  The  figures  in  this  table  are  based  upon  actual  sales, 
and  there  can  be  no  doubt  as  to  their  accuracy.  It  is,  however, 
to  be  remarked  that  the  certificates  are  held  mainly  by  the  large 
distillers  as  investments  (though  the  number  of  individual  cer- 
tificate holders  has  largely  increased),  and  that  comparatively 
few  transfers  of  trust  certificates  have  been  made.  The  prices 
quoted  of  course  depend,  too,  to  some  extent,  upon  the  amount 
invested  at  the  time.  The  certificates  are  not  listed  in  any  stock 
exchange,  and  there  cannot  be  said  to  be  any  regular  market 
for  them,  though  they  can  be  obtained  through  brokers  in  four 
of  the  principal  cities :  Peoria,  Chicago,  Cincinnati  and  New 
York.  The  figures  given  represent,  then,  almost  with  perfect 
accuracy,  the  value  placed  by  the  distillers  and  the  liquor  dealers 
upon  the  certificates. 

The  facts  given  with  reference  to  the  working  of  the  trust 


42 


TRUSTS,   POOLS  AND   CORPORATIONS 


seem  to  show  that  it  has  been  beneficial  to  the  greater  portion 
of  the  manufacturers  of  alcohol  and  spirits  in  the  United  States, 
although  individual  distillers  have  perhaps  made  no  more,  and 
some,  it  may  be,  have  made  even  less  profit  than  they  could 
have  made  acting  independently ;  while,  so  far  at  least,  the 
prices  to  consumers  have  not  been  on  the  whole  increased,  and 
the  tendency  seems  to  be  towards  lower  and  steadier  prices  for 
the  future.      As  has  been  said,  however,  only  the  future  can 


Diagram  illustrating  the  History 
1883=  1884.  1885. 


The  (dotted)  line  A  shows  the  average  market  value  of  corn  per  bushel  at  Peoria. 
The  line  B  shows  the  average  market  value  of  the  whiskey  (the  spirits  used  for  base 
in  prices)  from  one  bushel  of  corn.  To  obtain  this  value,  the  revenue  tax  was  de- 
ducted from  the  market  value  of  one  gallon,  and  the  difference  multiplied  by  the 
average  yield  per  bushel  of  corn.  — The  space  between  the  lines  A  and  B  represents, 
of  course,  the  cost  of  production  plus  the  profits.  During  the  greater  part  of  the 
pool's  existence,  assessments  for  export  expenses  must  be  deducted  from  the  profits. 
(See  Table  II.) 


THE    DEVELOPMENT   OF  THE   WHISKEY   TRUST      43 

determine  what  the  poHcy  of  the  trust  is  to  be.  Th^Jacts  seem 
to  show  that  it  is  within  the  power  of  the  trust  to  bring  about 
this  result;  and  it  seems  to  be  for  its  interest  so  to  do.  As 
regards  the  stronger  rivals  of  the  trust,  the  prices  have  so  far 
been  so  high  that  they  have  not  suffered  materially.  The  next 
year  or  two  will  show  whether  they  can  endure  the  competition. 
Even  if  they  should  be  forced  to  close,  the  question  is  still  an 
open  one  whether  more  distilleries  would  have  not  been  closed 


OF  THE  Whiskey  Pools  and  Trust.^ 
1885.  1886.  1887. 


1888. 


'89. 


The  line  in  the  lower  right-hand  corner  shows  the  fluctuations  in  the  value  of  the 
trust  certificates  :  par  value,  loo ;   cash  value  of  plant  estimated  at  about  30. 

1  Professor  Jenks.  in  his  Trust  Problem,  N.Y.,  1902,  p.  146,  continues  this 
price  diagram  to  1900.  Much  other  information  is  in  the  Reports  United 
States.  Industrial  Commission,  Vol.  I,  1900.  —  Ed. 


44  TRUSTS,    POOLS   AND    CORPORATIONS 

under  free  competition.  Many  stockholders  are  now  drawing 
dividends  from  the  trust  who,  without  the  trust,  would  doubtless 
have  lost  much  of  their  capital. 

At  the  time  of  the  formation  of  the  trust,  it  was  thought  by 
some  of  the  distillers  living  at  Peoria  that,  on  account  of  their 
unusual  facihties  for  manufacture,  the  trust  should  be  limited  to 
Peoria  distilleries  and  a  few  others  favorably  located.  The  ex- 
perience of  the  trust  seems  to  show  that,  had  this  plan  been 
followed,  the  trust  might  have  paid  higher  dividends  to  its  mem- 
bers and  might  also  have  held  the  price  of  alcohol  so  low  that 
outside  competition  would  not  have  been  much  more  successful 
than  it  has  been  under  the  present  arrangement.  Some  distillers 
who  believed  in  this  latter  plan  —  presumably  for  the  most  part 
Peoria  manufacturers  —  still  think  it  would  have  been  better  to 
have  limited  the  organization  to  five  years  with  the  option  then 
to  continue,  suspend,  or  reorganize.  They  feel  that  the  owners 
of  the  less  favorably  situated  distilleries  have  an  undue  advan- 
tage. Of  course,  this  depends  mainly  upon  the  relative  value 
placed  upon  the  plants  when  they  entered ;  but  it  is  probable 
that  it  would  have  been  cheaper  to  crush  some  of  the  weaker 
members  than  to  buy  them  by  admitting  them  to  draw  dividends. 
Against  this  view  is,  of  course,  the  fact  that  such  action  would 
have  aroused  bitter  hostility  that  might  well  have  resulted  in  the 
building  of  new  distilleries  in  locations  where  they  would  have 
become  formidable  rivals. 

On  the  whole,  while  there  is  this  slight  tendency  to  think 
that  matters  might  have  been  better  under  some  other  form  of 
organization,  or  even,  for  a  few,  with  no  organization  ;  and  while 
there  may  be  a  slight  feeling  that  the  trustees  are  not  entirely 
free  from  nepotism  in  their  appointments,  any  more  than  are  our 
highly  esteemed  executive  officers  of  the  United  States ;  yet,  as 
was  shown  a  year  ago  by  the  unanimous  reelection  of  all  the 
trustees  at  a  meeting  in  which  ninety-nine  and  one-half  per  cent 
of  all  the  certified  holders  were  represented,  as  well  as  by  the 
general  expression  of  satisfaction  on  the  part  of  the  distillers 
one  meets,  the  trustees  are  thought  to  have  performed  their 
responsible  duties  with  descretion,  and  the  trust  is  considered 
by  its  members  a  success.  j.  "W.  Jenks 


THE    DEVELOPMENT    OF   THE   WHISKEY    TRUST      45 

The  later  history  of  this  combination  has  been  checkered.  In  1890, 
it  was  reorganized  as  a  corporation,  as  the  Distilling  and  "CSlEtle  Feeding 
Co.  Its  ownership  of  distilleries  was  extended  to  practically  all  important- 
competitors.  In  1893,  failure  impending  because  of  the  accumulation 
of  floating  debts  for  unpaid  rebates,  bonds  were  issued.  For  two  years 
various  scandals,  mainly  speculative,  developed  under  its  control  by  re- 
ceivers; and  the  Supreme  Court  of  Illinois  in  1896  ousted  it  from  its 
franchises  (156  111.  448).  Meanwhile  in  1895  it  had  been  again  reor- 
ganized as  the  American  Spirits  Manufacturing  Co.,  incorporated  in  New 
York.  This  company  took  over  all  the  best  distilleries  in  the  field.  Other 
plants  and  branches  of  the  business  were  independently  incorporated  under 
the  laws  of  New  Jersey  during  the  next  four  years  in  three  principal  com- 
panies. These  were  again  united  to  the  main  stem  in  1899,  as  The  Dis- 
tilling Co.  of  America,  capitalized  at  $125,000,000.  Over  ninety  per  cent 
of  the  securities  of  this  company  in  1902  were  in  turn  acquired  by  a  holding 
or  finance  company,  the  Distillers'  Security  Corporation  of  New  Jersey,  which 
has  issued  about  $50,000,000  of  capital  stock.  —  Ed. 

Note.  W.  S.  Stevens,  Industrial  Combinations  and  Trusts,  1913,  pp.  4  and  36, 
reprints  texts  of  agreements.  His  chapters  II  and  IV  give  additional  data  on  the 
legal  trust  form  of  organization.  Standard  Oil  experience  is  outlined  in  Chapter 
XVII,  infra. 


Ill 

THE   WIRE-NAIL    ASSOCIATION    OF    1895-96 
AND   OTHER   IRON    AND   STEEL   POOLS  ^ 

SO  lately  as  1888  TJie  American  Architect  began  an  article 
on  nails  in  this  way :  "  The  nails  commonly  used  in  con- 
nection with  building  operations  are  too  well  known  to  require 
any  description.  They  are  specifically  designated  as  plate 
nails."  That  year,  1888,  was  almost  the  first  in  which  plate 
or  cut  nails  felt  a  real  competition  from  wire  nails.  In  that 
year  the  latter  formed  less  than  a  fifth  of  the  total  product; 
in  1895  they  constituted  nearly  three  fourths.  The  idea  of 
making  nails  of  wire  did  not  arise  in  America;  in  fact,  our 
people  were  even  somewhat  slow  to  adopt  it.  The  first  wire 
nails — headed  by  hand  and  ground  to  a  point  — appear  to  have 
been  made  in  France  early  in  this  century.  Mr.  M.  Baackes, 
an  old  wire-nail  manufacturer  of  Cleveland,  says  that  the  first 
machine  for  forming  the  heads  was  made  in  France  about  1850. 
According  to  Mr.  John  Hassall,  who  is  still  engaged  in  making 
wire-nail  machinery  in  New  York  city,  his  father  was  active  in 
making  and  running  the  first  wire-nail  machines  used  in  this 
country,  early  in  the  fifties.  The  business  seems  to  have 
extended  itself  only  modestly,  for  Mr.  Baackes  regards  the 
factory  which  he  helped  to  start  at  Covington,  Ky.,  in  1875,  as 
"the  first  mill  for  the  manufacture  of  wire  nails  on  this  side 
of  the  Atlantic."  The  production  rose  from  20,000  kegs  in 
1880,  according  to  Mr.  Baackes's  estimate,  to  125,000  in  1887; 
and  the  average  price  fell  from  $20.00  per  keg  in   1875    and 

1  From  the  Political  Science  Quarterly^  Vol.  XII,  1897,  pp.  246-272.  Some  foot- 
notes are  omitted  on  account  of  lack  of  space.  For  the  best  analysis  of  modern 
pools,  one  should  consult  W.  S.  Stevens,  American  Economic  Review,  19 13,  pp,  545- 
575.  — Ed. 

46 


THE   WIRE-NAIL  ASSOCIATION    OF    1895-96  47 

$10.00  in  1880  to  $4.81  in  1887.  At  the  end  of  iSS^^a  manu- 
facturer wrote  :  "  Wire  nails  are  now  quoted  at  less  than  actual 
cost,  as  results  will  in  time  demonstrate."  ^  About  the  same 
time  the  Iron  Age,  the  leading  paper  of  the  hardware  trade, 
said  editorially :  "  It  is  evident  that  the  business  is  now  greatly 
overdone."  ^  The  production  increased,  however,  to  more  than 
300,000  kegs  in  1890,  and  to  nearly  600,000  kegs  in  1895;  and 
the  average  price  fell  to  $2.85  in  1890,  according  to  the  esti- 
mate of  Mr.  Baackes,  and  to  $1.60  in  1894.  At  present,  April  i, 
1897,  it  is  about  $1.50.  These  facts  show  how  recently  and 
how  rapidly  the  business  has  attained  importance,  and  how 
fast  the  price  of  wire  nails  has  fallen. 

The  profits  of  the  early  wire-nail  men,  as  first  comers  in  the 
field,  were  doubtless  good ;  but  the  cost  of  production  at  that 
time  must  not  be  gauged  by  the  later  selling  prices.  At  the 
outset  their  machinery  was  imperfect.  Then,  the  first  nails 
were  of  small  sizes,  for  special  purposes,  such  as  use  in  cigar 
boxes,  furniture,  mouldings,  and  wagons ;  and  small  nails  are 
relatively  costly.  It  was  not  till  1886  that  a  list  of  regular  or 
"penny"  nails  was  published,  and  a  serious  effort  was  made 
to  compete  with  cut  nails  in  the  general  market.  The  wire  of 
the  first  makers,  too,  was  all  of  Norway  iron  ;  for  they  could  not 
get  any  other  material  on  which  they  could  form  a  head  that 
would  not  break  off  in  driving.  The  H.  P.  Nail  Co.,  established 
in  1879,  is  said  to  have  been  the  first  to  succeed  in  using  Bes- 
semer steel  wire.  Finally,  the  price  of  Bessemer  steel  itself 
was  at  first  much  higher  than  now.  Although  quotations  on 
steel  billets  earlier  than  1887  are  not  available,  their  fall  in  price 
may  be  gauged  by  that  of  steel  rails,  which  dropped  from  an 
average  of  $48.25  per  ton  in  1879  and  $67.50  in  1880  to  $37.08 
in  1887.  Billets  were  $32.55  on  the  average  in  1887  and  $16.58 
in  1894,2  while  they  are  now  quoted  at  about  $15.00.  It  was 
the  removal  of  these  early  limitations  that  made  possible  the 
great  expansion  of  the  industry. 

As  the  business  is  now  carried  on,  regular  nails  are  sold  with 
reference  to  a  "base  price"  and  a  uniform  schedule,  or  "card/' 

1  Iron  Age,  Jan.  5,  1888,  p.  22.  2  jud^ 

3  Report  of  American  Iron  and  Steel  Association,  1896,  p.  26. 


48  TRUSTS,   POOLS  AND   CORPORATIONS 

of  "extras."  Excepting  under  the  card  made  in  1895,  the  base 
has  always  been  the  same  as  the  price  of  the  largest  nails.  It 
is  the  base  only  that  is  named  in  market  reports  and  in  quota- 
tions. The  extras,  which  are  added  to  the  base  to  determine 
the  prices  of  the  smaller  sizes,  are  fixed  by  agreement  of  the 
manufacturers,  and  are  likely  to  remain  unchanged  for  several 
years  together.  From  April  11,  1892,  to  July  19,  1895,  the 
card  was  as  follows  : 


60-d. 

base 

(no  e 

50-d. 

$.10 

extra 

30-d. 

and  40-d, 

.25 

li 

20- d. 

•35 

a 

l2-d. 

"     i6-d. 

•45 

u 

lo-d. 

•50 

« 

8-d. 

"       9-d. 

.60 

<( 

6-d. 

«       7-d. 

•75 

« 

4-d. 

"       5-d. 

.90 

« 

3-d. 

1.20 

« 

2-d. 

1.60 

« 

When  60-d.  nails  were  quoted  at  $.85,  put  up  in  a  keg  which 
I  am  assured  by  a  manufacturer  cost  at  least  $.09,  the  wire  from 
which  they  were  made  was  quoted  at  $1.15.  Every  nail-maker 
who  bought  his  wire  in  the  market  lost  the  whole  cost  of  hand- 
ling and  manufacture,  and  nearly  four-tenths  of  a  cent  besides, 
on  every  pound  of  60-d.  nails  he  sold.  The  explanation  of  his 
apparent  willingness  to  sell  below  cost  is  found  in  the  char- 
acter of  the  list  of  extras,  and  in  the  manner  in  which  all  orders 
were  required  to  be  assorted.  The  extras  on  all  the  smaller 
nails  were  far  greater  than  the  differences  in  cost  between  them 
and  the  largest.  Indeed,  the  wire  for  a  keg  of  12-d.  nails  cost 
no  more  than  that  for  a  keg  of  60-d.  No  manufacturer  would 
sell  60-d.  alone  at  the  market  price.  All  orders  had  to  be  so 
assorted  that  the  average  of  the  extras  on  the  whole  should  be 
at  least  $.60  per  keg :  that  is,  if  a  dealer  gave  an  order  for  a 
hundred  kegs,  at  a  base  price  of  $.85,  he  had  to  make  it  up  in 
such  a  way  that  the  average  price  of  the  whole,  by  the  schedule, 
would  be  not  less  than  $1.45.  So  the  loss  on  the  larger  and 
cheaper  sizes  was  covered  by  the  gain  on  the  smaller  and  dearer. 
Some  small  manufacturers  took  advantage  of  this  artificial  ad- 


THE   WIRE-NAIL   ASSOCIATION    OF    1895-96  49 

justment  of  prices,  by  making  only  the  smaller  sizes, ^d  leaving 
the  losing  end  of  the  schedule  to  the  great  establishments. 

I.    History  of  the  Association 

Iron  and  steel  products  have  been  particularly  fruitful  of  com- 
binations ;  but  before  1895  circumstances  had  not  been  favor- 
able to  bringing  wire  nails  into  the  list.  The  manufacturers  had 
been  fairly  contented,  making  the  comfortable  profits  of  a  new 
and  rapidly  growing  business.  It  is  probable  that  combinations 
are  not  easily  formed  in  any  industry  so  long  as  the  average 
man  of  those  concerned,  with  average  advantages,  can  make  such 
a  profit  as  the  general  opinion  of  business  men  pronounces  fair ; 
and  that  consolidation  generally  results  from  a  strong  sense 
of  pressure.  In  this  business,  by  the  beginning  of  1895,  the 
necessary  pressure  had  developed.  The  manufacturers  cried 
out  with  one  voice  that  they  were  ruined  by  competition.  It 
must  be  noted,  however,  that  most  men  do  not  consider  it  good 
policy,  under  any  circumstances,  to  magnify  their  profits  before 
the  world  ;  that  men  who  have  been  accustomed  to  large  profits 
do  really  imagine  themselves  ruined  when  they  are  reduced  to 
not  much  more  than  ordinary  interest  on  their  capital ;  and  that 
lugubrious  statements,  made  in  general  terms  and  without  fig- 
ures, ought  not  to  be  taken  without  salt.  The  bulk  of  the  wire- 
nail  business  was  in  the  hands  of  six  or  eight  great  companies, 
which  had  their  own  wire  mills  and  rod  mills,  and  put  the  material 
through  all  the  processes  from  the  form  of  the  steel  billet.  So 
long  as  smaller  concerns,  buying  their  wire  in  the  market,  con- 
tinued to  do  business,  it  strains  credulity  somewhat  to  believe 
that  the  great  establishments  did  not  make  moderate  profits. 
The  curious  arrangement  of  the  schedule  of  extras  does  seem  to 
have  given  a  certain  opportunity  to  small  makers  ;  but  the  matter 
was  in  the  hands  of  the  great  companies,  and  they  would  have 
changed  the  schedule  if  they  had  found  it  to  work  strongly 
against  them.  The  strict  requirement  of  assorted  orders  made 
it  impossible  for  any  maker  of  small  nails  only  to  do  more  than  a 
very  restricted  business.  If  any  dealer  bought  many  nails  of  such 
a  maker,  he  could  not  buy  his  large  nails  at  the  market  price. 


50  TRUSTS,    POOLS   AND   CORPORATIONS 

The  days  of  good  profit  to  the  average  man  with  average 
advantages  were,  however,  gone  by ;  and  the  manufacturers  — 
large  and  small  alike  —  were  in  a  state  of  mind  to  yield  them- 
selves plastic  to  the  hand  that  could  organize  the  machinery  for 
increasing  profits.  This  hand  belonged  to  Mr.  John  H.  Parks 
of  Boston,  who  had  been  a  member  of  the  old  firm  of  Loring  & 
Parks,  long  well  known  as  manufacturers  of  tacks.  That  firm 
combined  with  their  principal  competitors,  some  six  years  ago, 
in  forming  the  Atlas  Tack  Corporation,  which  is  still  the  giant 
of  the  tack  trade ;  though  the  leading  men  connected  with  it 
have  thought  it  well  during  the  last  few  months  to  put  it 
through  a  receivership  and  a  reorganization,  with  the  usual 
absorption  of  the  interests  of  the  smaller  investors.  For  sev- 
eral years  past,  Mr.  Parks  has  confined  his  personal  attention 
to  the  promotion  of  combinations  in  various  lines  of  hardware. 
Bolts  and  shovels,  as  well  as  tacks  and  nails,  have  known  his 
supple  hand.  From  a  time  early  in  the  spring  of  1895,  he 
seems  to  have  been  busy  in  working  up  an  agreement  among 
the  manufacturers  of  nails.  The  approaching  consummation 
of  this  enterprise  was  announced  on  May  2,  through  the  Iron 
Age,  in  the  following  words : 

With  a  view  to  securing  a  better  condition  of  things  and  correcting 
influences  which  hitherto  have  tended  toward  irregularity  in  prices  and 
the  unsettling  of  the  market,  the  manufacturers  have  been  conferring 
with  a  view  to  concerted  action  in  this  direction. 

The  combination  began  its  activity  with  the  customary  decla- 
ration as  to  its  moderate  purposes  with  respect  to  price.  In 
the  article  from  which  I  have  quoted,  this  vital  matter  is  thus 
dealt  with  :  "  The  manufacturers  directly  concerned  in  the  move- 
ment disclaim  any  intention  of  advancing  prices  unreasonably, 
their  purpose  being  to  market  their  goods  at  a  reasonable 
profit." 

The  first  effect  of  the  rise  of  the  combination  was  a  press  of 
orders.  Many  jobbers  bought  all  the  nails  that  they  expected 
to  need  for  six  months  or  more.  From  about  May  i  the  manu- 
facturers refused  to  accept  any  orders  for  shipment  later  than 
May  30.     By  May  15  the  base  price  had  risen  to  $.95  ;  and  by 


THE   WIRE-NAIL  ASSOCIATION    OF    1895-96  51 

the  20th  it  had  become  so  difficult  to  place  large  orders  that 
there  was  no  quotable  price.  Some  sales  were,  however, 
reported  about  this  time  at  $1.1$  to  $1.20.  The  combination 
was  formally  completed  in  the  last  week  of  May,  and  the  base 
price  for  June  was  fixed  at  $1.20,  for  car  lots,  f.  o.  b.  Pittsburg. 
All  nails,  no  matter  from  what  mill,  were  to  be  sold,  freight 
paid,  on  the  basis  of  the  Pittsburg  price,  plus  the  rate  of  freight 
from  Pittsburg  to  the  point  of  destination.  For  instance,  a  cus- 
tomer at  Anderson,  Ind.,  would  have  to  pay  a  base  price,  consist- 
ing of  $1.20  plus  the  rate  of  freight  from  Pittsburg  to  Anderson, 
whether  he  bought  in  Pittsburg,  or  in  Cleveland,  or  from  the  mill 
in  his  own  town.  Jobbers  were  allowed  a  discount  of  five  cents 
per  keg  on  purchases  of  a  thousand  kegs  from  one  mill  within 
one  calendar  month  ;  and  the  minimum  was  soon  reduced  to  five 
hundred  kegs.  In  addition,  a  rebate  of  ten  cents  per  keg,  pay- 
able after  six  months,  was  offered  to  jobbers  who  should  neither 
buy  any  nails  from  outside  makers  nor  sell  below  the  associa- 
tion price. 

The  form  of  the  association  was  that  of  a  simple  pool.  Prices 
and  output  were  always  fixed  for  a  month  in  advance.  The 
agreed  production  was  apportioned  to  the  companies  on  a  basis 
depending  partly  on  sales  for  three  months  before  the  pool  was 
formed,  partly  on  production  in  one  of  those  three  months,  and 
partly  on  capacity  as  indicated  by  the  number  of  machines. 
Any  mill  could  sell  its  privilege  of  production,  or  any  part  of  it ; 
but  every  mill  was  rigidly  restricted  to  its  allotment  during  each 
calendar  month,  unless  it  bought  the  allotment  of  another.  A 
cost  price  was  assumed,  which  was  supposed  to  represent  the 
cost  of  production  at  Pittsburg;  and  the  cost  at  every  other 
point  was  assumed  to  be  equivalent  to  the  Pittsburg  cost  with 
freight  from  Pittsburg  added.  This  was  because  the  raw  mate- 
rial comes  chiefly  from  the  Pittsburg  region.  So  the  selling 
price,  including  delivery  at  the  buyer's  railroad  station,  and  the 
assumed  cost  price  were  harmonized  by  the  use  of  the  Pittsburg 
base.  All  the  profits,  above  the  cost  prices  so  arrived  at,  were 
paid  into  the  pool ;  and  the  amount  in  the  pool,  after  paying  all 
expenses,  was  divided  monthly.  The  basis  of  division  was  the 
same  as  the  basis  for  the  allotment  of  production. 


52  TRUSTS,   POOLS  AND   CORPORATIONS 

An  inspector,  hired  by  the  association,  was  placed  at  each 
association  mill,  with  the  most  sweeping  powers  of  investigation. 
Every  part  of  the  mill,  every  book,  every  letter  written  or  re- 
ceived, was  open  to  him.  So  far  as  possible,  outside  owners 
of  nail  machines  were  hired  to  keep  them  idle,  and  makers  of 
machines  were  hired  to  refuse  orders  for  them  from  persons 
outside  the  association.  For  a  year  it  was  very  difficult  to  buy 
a  machine,  and  while  the  association  lasted  it  was  never  easy. 
A  company  which  went  into  the  business  in  the  autumn  of  1896 
writes : 

We  found  the  market  in  which  we  could  buy  machines  was  very 
limited,  most  of  the  machine  manufacturers  having  entered  into  an 
arrangement  with  the  combination  to  stop  making  them  for  outside 
parties.  We  were  unable  to  obtain  what  we  wanted,  and  consequently 
our  production  of  nails  was  much  below  what  we  intended  it  to  be  when 
we  started. 

With  a  similar  combination  of  Canadian  nail  manufacturers, 
the  association  made  an  agreement  1  ^  which  each  bound  itself 
not  to  offer  goods  in  the  territory  of  the  other.  Efforts  were 
also  made  to  induce  the  European  manufacturers  to  agree  to 
let  none  of  their  nails  come  to  America.  Although  it  is  said 
that  they  did  not  meet  with  much  success,  only  one  large  lot  of 
nails  and  a  few  small  lots  were  actually  imported  during  the 
existence  of  the  pool. 

The  agreement  of  the  wire-nail  men  was  accompanied  by  a 
similar  agreement  of  the  cut-nail  men.  Although  separate  in 
form,  these  two  organizations  acted  as  one.  The  price  of  cut 
nails  was  accordingly  advanced  with  that  of  wire  nails,  at  first 
20  cents  below,  and  afterwards  uniformly  25  cents  below  —  a 
difference  not  relatively  greater  than  that  which  had  existed 
before  the  pool  was  formed.  Wire  nails  were  so  far  preferred 
that,  in  spite  of  the  difference  in  price,  their  competition  had 
reduced  the  trade  in  cut  nails  to  a  fraction  of  its  former  size, 
and  had  thrown  hundreds  of  cut-nail  machines  out  of  use.  The 
existence  of  these  machines  was  one  of  the  chief  sources  of 
embarrassment  to  the  two  associations.  The  wire-nail  pool  had 
to  turn  over  large  sums  to  its  weaker  associate,  to  be  used  in 


THE  WIRE-NAIL  ASSOCIATION   OF    1895-96  53 

paying  the  owners  of  these  old  cut-nail  machines  to*keep  them 
idle. 

The  demand  for  nails  continued  very  strong  through  June. 
The  production  for  the  month  had  been  restricted  somewhat,  in 
order  to  insure  control  of  the  market.  Before  the  12th  the 
mills  had  sold  their  entire  allotments  for  the  month  and  were 
refusing  all  orders.^  Yet,  at  their  meeting  held  the  week  fol- 
lowing, they  made  a  further  restriction  of  their  output  for  July, 
reducing  it  to  about  half  the  average  monthly  product  for  the 
previous  year,^  and  fixing  the  price  for  July  at  $1.55.  Dealers 
anticipated  a  further  advance,  and  in  their  desire  to  protect 
themselves  clamored  for  nails.  Before  July  4  some  manufac- 
turers had  sold  their  entire  allotment  for  the  month  and  were 
again  refusing  orders.  By  the  loth,  few  nails  could  be  bought 
from  manufacturers.^  On  July  18  a  new  "card,"  or  schedule 
of  extras,  was  adopted.  The  extras  on  lo-d.  and  smaller  nails 
were  not  changed ;  but  all  larger  sizes  were  put  on  an  equality 
with  lo-d.,  with  an  extra  of  50  cents.  The  requirement  of 
assorted  orders,  or  a  minimum  average  of  extras,  was  abolished ; 
but  the  lowest  extra  was  now  almost  up  to  the  old  required  aver- 
age.    The  base  price  for  August  was  made  $2.05. 

The  success  of  the  nail  combination  had  been  followed  by  a 
sharp  and  general  advance  in  the  prices  of  iron  and  steel  prod- 
ucts, and  had  doubtless  contributed  to  cause  it.  A  market 
report  of  May  30  said:  "Billets  are  ^17.50  and  will  likely  be 
higher,  and  the  agreement  reached  by  the  wire-nail  mills  is  also 
having  its  effect  on  rods,  and  prices  are  very  much  higher."* 
Between  May  i  and  August  i  plain  wire,  from  which  nails  are 
made,  rose  from  a  base  price  of  $1.10  per  cwt.  to  ^1.50;  wire 
rods,  from  which  wire  is  drawn,  from  ^21.00  per  gross  ton  to 
^29.00;  steel  billets,  from  which  rods  are  rolled,  from  $15.50 
per  gross  ton  to  $21.50.  There  seems  to  have  been  what  is 
called  a  good  understanding  between  the  producers  in  these 
lines,  but  no  formal  combination.  On  August  22,  however, 
this  announcement  appeared:  "The  barb-wire  trade  has  been 
organized  on  the  same  lines  as  the  wire-nail  trade.     A  sharp 

1  Iro7t  Age,  June  13,  1895,  P-  1248.  ^  /^,v/, 

2  Ibid.,  July  II,  1895,  p.  85.  *  Ibid.,  May  30,  1895,  P-  ^HS- 


54  TRUSTS,    POOLS   AND    CORPORATIONS 

advance  in  prices  has  been  made.  Plain  wire  will  likely  advance 
in  sympathy  with  barb  wire."  ^  On  September  5  it  was  an- 
nounced that  prices  of  plain  wire  had  been  advanced,  "  as  the 
result  of  an  understanding  arrived  at  by  the  manufacturers." 
The  base  price  of  wire  nails  was  advanced  to  $2.25  on  Septem- 
ber I,  "in  view  of  the  increased  cost  of  raw  material."  The 
demand  had  continued  good  during  August.  In  the  latter  part 
of  the  month,  in  consequence  of  the  restriction  of  output,  there 
had  been  some  scarcity.  In  September  the  demand  began  to 
fall  off  notably,  but  the  mills  disposed  of  their  allotments  for 
the  month.  Trade  was  poor  in  October,  and  in  November  it 
was  very  light.  The  manufacturers  complained  particularly  of 
the  large  stocks  which  the  jobbers  had  on  hand,  and  which  some 
of  them  were  offering  rather  under  the  combination  price.  The 
pool  was  strengthened  in  November,  however,  by  the  accession 
of  several  companies  which  had  been  operating  outside. 

About  November  25  the  only  large  lot  of  nails  which  has 
been  imported  into  this  country  in  many  years  was  received  by 
the  Bigelow  &  Dowse  Co.,  of  Boston.  Rumor  puts  the  amount 
at  about  5000  kegs,  or  20  carloads.  Several  small  lots  were 
received  at  New  York  during  the  next  year,  but  the  largest  is 
not  believed  to  have  exceeded  500  kegs.  It  is  not  known  by 
what  means  the  Bigelow  &  Dowse  Co.  were  convinced  that  it 
would  be  better  not  to  repeat  their  operation  ;  but  apparently 
they  did  not  cut  the  association  price,  and  they  brought  in  no 
more  nails.  Jobbers,  who  investigated  the  matter  with  a  view 
to  importing,  say  that  English  nails  could  not  at  any  time  have 
been  imported  with  profit,  but  that  German  and  Belgian  nails 
could  have  been  laid  down  in  Boston  or  New  York  at  from  50 
to  70  cents  below  the  highest  price  reached  by  the  pool,  even 
after  paying  the  duty  of  25  per  cent.  It  required  more  cour- 
age than  appears  at  first  sight,  however,  to  venture  on  placing 
foreign  orders.  The  German  and  Belgian  nails  are  shipped  in 
bags,  and  to  make  them  salable  in  the  American  market  they 
must  be  kegged  after  receipt,  at  an  expense  of  from  10  to  20 
cents  a  keg.  The  head  is  formed  a  little  differently  from  that 
of  the  American  nail,  and  the  tendency  of  human  nature  to 

1  Iron  Age,  Aug.  22,  1895,  P-  4°4- 


THE  WIRE-NAIL  ASSOCIATION   OF    1895-96  55 

reject  the  unaccustomed  might  cause  some  objection-4©  it.  But 
the  chief  deterrent  of  imports,  aside  from  the  tariff,  was  the 
power  of  the  pool  to  drop  the  price  at  any  time  to  a  point  that 
would  cause  the  importer  a  very  serious  loss.  Nothing  would 
have  been  so  likely  to  cause  a  drop  as  the  fact  that  large  for- 
eign orders  were  being  placed. 

The  duty  on  nails  does  not  now  serve  any  purpose  except  to 
increase  the  power  of  combinations.  Nails  are  produced  here 
as  cheaply  as  anywhere  in  the  world,  and  are  regularly  exported. 
The  duty  does  not  protect  the  industry,  and  under  full  compe- 
tition does  not  affect  the  price.  But  if  there  had  been  no  duty 
when  the  pool  was  organized,  either  it  would  not  have  been 
organized,  or  it  would  have  had  to  content  itself  with  a  much 
more  moderate  advance.  An  excessive  advance  would  have 
caused  the  other  obstacles  to  importation  to  be  overcome,  and 
would  have  led  to  free  purchases  abroad. 

In  December  the  manufacturers  gave  jobbers  a  guaranty  on 
their  December  purchases  against  decline  in  January :  that  is, 
they  agreed  that,  if  they  made  a  reduction  of  price  in  January, 
they  would  give  jobbers  a  corresponding  rebate  on  such  nails 
bought  in  December  as  they  had  still  on  hand.  This  policy 
was  thereafter  followed  from  month  to  month  till  near  the 
breaking  up  of  the  association.  It  was  meant  to  induce  freer 
buying  by  the  jobbers  ;  but  its  success  was  slight.  The  demand 
for  nails  was  exceedingly  hght  during  the  winter,  and  the  stag- 
nation propagated  itself  back  to  the  market  for  raw  material. 
In  a  market  report  of  January  2,  1896,  is  this  remark:  "Until 
there  is  an  improvement  in  the  wire  and  wire-nail  trades,  it  is  not 
likely  there  will  be  any  demand  for  rods."  On  January  16  it 
was  stated  from  Pittsburg  that  no  sales  of  rods  had  been  reported 
in  that  market  for  some  time.  Early  in  February  the  nail 
association  announced  an  advance  of  15  cents,  to  take  effect 
March  i.  This  galvanized  the  market  into  a  mild,  convulsive 
movement.  The  operation  was  repeated  in  April,  with  an  an- 
nouncement of  an  advance  of  15  cents  to  take  effect  May  i. 
Trade  was  very  dull,  however,  and  the  manufacturers  admitted 
that  the  market  was  a  good  deal  disturbed  by  outside  nails  and 
by  the  offerings  of  jobbers.     High  prices  had  so  curtailed  con- 


56  TRUSTS,    POOLS   AND    CORPORATIONS 

sumption  that  a  considerable  quantity  of  nails,  bought  before 
the  pool  was  formed  or  in  its  early  days,  was  probably  still  in 
the  jobbers'  hands.  These  formed  a  disturbing  element,  in  addi- 
tion to  the  growing  production  of  outside  factories. 

About  April  i,  1896,  the  makers  of  steel  billets  formed  a 
pool.  The  amount  of  billets  in  the  hands  of  middlemen,  or 
contracted  for  by  them,  was  so  great,  however,  that  the  attempt 
of  the  pool  to  raise  prices  ^3  or  more  per  ton  was  only  partially 
successful.  The  wire-rod  makers  also  tried  to  form  a  pool,  but 
after  much  negotiation  were  unable  to  agree.  Their  good  under- 
standing, however,  seems  to  have  continued. 

Early  in  June  the  nail  association  succeeded  in  coming  to 
terms  with  the  Pittsburg  Wire  Co.  and  Baackes  &  Co.,  of  Pitts- 
burg, by  which  these  companies  agreed  to  stop  making  wire  nails. 
Their  nail  mills  were  by  no  means  of  the  first  rank ;  but  they 
were  large  enough  to  make  a  considerable  figure  in  the  market 
under  the  existing  circumstances  of  very  small  consumption,  and 
they  had  been  selling  somewhat  below  the  association  price. 

If  the  statements  of  the  manufacturers  could  be  accepted 
freely,  we  should  need  to  explain  to  ourselves  the  rather  curious 
phenomenon  of  producers  keeping  the  price  of  their  product 
abnormally  high,  contrary  to  their  own  desires,  in  deference  to 
the  wishes  of  their  customers.  It  was  semi-officially  announced 
that  while  the  manufacturers  came  to  their  meeting  on  June  3 
with  the  general  expectation  that  some  action  would  be  taken  looking 
toward  a  reduction  in  price,  they  were  confronted  with  many  letters 
from  jobbers  emphasizing  the  injury  that  would  be  done  to  the  market 
by  the  reduction  in  the  price  of  so  staple  a  commodity  as  nails,  and 
urging  the  manufacturers  to  maintain  existing  prices.^ 

Such  a  phenomenon  would  not  have  been  inexplicable  if  it 
had  existed ;  but  an  examination  of  twenty-nine  letters  of 
jobbers  on  the  situation,  published  about  that  time,  indicates 
that  it  was  essentially  a  myth.  Two  of  these  regarded  the 
price  as  a  matter  which  concerned  no  one  except  the  manu- 
facturers, and  which  no  one  else  ought  to  trouble  himself  about. 
Only  seven  could  be  counted  against  an  instant  reduction,  on 
any  construction  of  their  words.     Nineteen  either  were  opposed 

^  Iro7i  Age,  June  ii,  1896,  p.  1384. 


THE    WIRE-NAIL   ASSOCIATION    OF    1895-96  57 

to  the  existing  high  prices  or  at  least  went  so  far  a^o  say  that, 
if  a  reduction  were  to  come  before  January  i  (a  matter  on  which 
they  expressed  no  opinion),  it  had  better  come  at  once.  The 
retailers  were  unanimous  for  reduction,  complaining  of  a  great 
falling  off  in  their  sales,  which  some  put  as  high  as  fifty  per 
cent.  They  reported  that  building  and  repairing  were  much 
interfered  with. 

Meantime  a  growing  number  of  small  mills  gave  the  association 
increasing  annoyance.  By  July  i  it  was  estimated  that  25,000 
kegs  a  month  were  made  by  outside  mills.  The  total  sales  for 
June,  by  the  association  and  outsiders,  were  estimated  at  90,000 
kegs ;  1  while  it  was  said  that  the  allotment  for  July  was  65,000 
kegs,^  and  that  the  associated  manufacturers  did  not  sell  so 
many.^  These  statements  were  made  by  the  Pittsburg  office  of 
the  Iron  Age,  which  was  at  the  centre  of  the  movement,  and 
which  ought  not,  it  would  seem,  to  have  sent  out  any  but  well- 
founded  statements  —  at  least  about  matters  so  definitely  fixed 
as  the  monthly  allotment.  There  is  reason,  however,  for  sup- 
posing that  these  figures  were  too  low.  A  man  who  knows  the 
innermost  history  of  the  combination  has  said  that  he  does  not 
think  there  was  any  month  in  which  the  manufacturers  in  the 
pool  did  not  sell  150,000  kegs.  This  statement  seems  modest 
enough,  considering  that  the  average  monthly  production  for 
1895  was  nearly  500,000  kegs. 

Rumors  of  concessions  and  irregularities  in  price  increased. 
On  September  i  the  guaranty  to  jobbers  on  each  month's  pur- 
chases against  decline  in  the  succeeding  month  was  discontinued. 
It  was  noted  with  satisfaction  that,  in  spite  of  the  low  prices 
which  had  to  be  made  to  meet  foreign  competition,  the  export 
trade  was  assuming  relatively  large  proportions.'*  Early  in  Sep- 
tember several  outside  manufacturers  were  induced,  on  expensive 
terms,  to  withdraw  from  the  market.  It  was  claimed  that  the 
production  of  those  still  outside  was  insignificant ;  but,  in  spite 
of  this  claim,  the  association  lost  its  grip  on  prices  to  an  extent 
far  greater  than  at  any  earlier  time.  Chicago  was  the  centre  of 
greatest  disturbance.     Nails  were  openly  offered  there  by  jobbers 

^  Iro7i  Age,  July  23,  1896,  p.  186.  ^  Ihid.^  Aug.  13,  1896,  p.  334. 

2  Ibid.,  July  30,  1896,  p.  236.  *  Ibid.,  Sept.  10,  p.  512. 


58  TRUSTS,   POOLS  AND   CORPORATIONS 

at  ^2.50,  and  finally  at  $2.25,  for  small  lots  from  store,  for  which 
the  association  price  was  $2.80.  The  demand,  however,  showed 
a  great  improvement  in  September,  and  it  continued  good  in 
October.  It  was  estimated  that  the  total  output  for  October 
would  be  about  250,000  kegs,^  or  about  half  the  average  monthly 
output  for  1895.  Soon  after  October  i,  the  manufacturers  suc- 
ceeded in  patching  up  the  trouble  at  Chicago ;  and  about  the 
15th  the  market  reports  said  that  there  was  "not  a  suspicion  of 
weakness  in  any  direction,"  and  that  the  association  had  "demon- 
strated its  ability  to  control  the  situation."  It  was,  nevertheless, 
hardly  two  weeks  before  the  final  break  appeared.  About  No- 
vember I  Chicago  jobbers  began  to  offer  nails  from  store  at 
$2.40.  The  break  spread  rapidly,  and  by  the  loth  the  associa- 
tion price  was  merely  nominal.  Demand  continued  light.  No 
one  bought  more  nails  than  he  had  to  have,  because  to-day's 
price  was  always  Hkely  to  be  bettered  to-morrow.  About  No- 
vember 20  nails  were  openly  offered  at  Chicago  at  $1.50  by  rep- 
resentatives of  association  mills.  On  December  i  the  association 
held  its  last  meeting,  adopted  a  new  card  of  extras,  and  formally 
dissolved.     The  new  extras  on  common  nails  are  as  follows : 

20-d.  to  60-d.  base 

lo-d.  "  i6-d.  ^.05 


8-d.  and  9-d. 
6-d.  "  7-d. 
4-d.  «  5-d. 
3-d. 


10 
,20 
30 

•45 

,70 


2-d. 

This  schedule  makes  a  large  reduction  in  the  relative  price 
of  small  nails,  which  was  undoubtedly  intended  to  shut  out  the 
small  manufacturers  who  had  been  making  small  nails  only. 
The  new  card,  however,  comes  much  nearer  than  any  previous 
one  to  representing  the  relative  cost  of  large  and  small  nails, 
under  present  conditions  of  manufacture. 

II.     The  Course  of  Prices 

When  it  is  said  that  nails  were  selling  on  May  I,   1895,  at 
$.85,  and  that  on  May  i,  1896,  the  association  made  the  price 

^  Iroti  Age,  Oct.  29,  1896,  p.  837. 


THE   WIRE-NAIL   ASSOCIATION    OF    1895-96  59 

$2.55,  the  price  appears  to  have  been  multipHed  vyiihin  a  year 
exactly  by  three.  The  case  looks  still  worse  when  it  is  said  that, 
60-d.  nails  sold  in  1895  for  $.85  a  keg,  and  in  1896  for  $3.05. 
In  reality,  while  an  ordinary  bill  of  nails  would  have  cost  on 
May  I,  1896,  at  least  $1.70  per  keg  more  than  a  year  earlier, 
it  would  not  have  cost  three  times  as  much.  No  nails  were 
sold  at  the  nominal  base  price  in  1896;  and  though  60-d.  nails 
were  nominally  sold  at  the  base  rate  before  the  change  of  card 
in  1895,  the  statement  that  the  price  of  60-d.  nails  was  at  one 
time  $.85  gives  a  false  impression,  for  reasons  which  I  have 
explained,  A  comparison  of  base  prices  after  December  i,  1896, 
with  earher  ones  is  altogether  misleading,  because  the  present 
extras  are  much  smaller.  It  has  been  estimated  that  a  well- 
assorted  order  of  nails  would  carry  an  average  extra  of  about 
$.62  on  the  old  card,  $.70  on  that  of  July  19,  1895,  and  $.12 
on  that  of  December  i,  1896.^  Perhaps  there  is  no  better  simple 
measure  of  the  actual  course  of  the  market  than  the  change 
in  the  price  of  8-d..  nails.  This  size  is  used  in  large  quantities ; 
and  when  assorted  orders  were  required,  the  extra  on  it  was 
the  same  as  the  required  average  of  extras.  But  this  does  not 
give  a  perfectly  true  idea  of  the  changes  of  price.  It  is  nec- 
essary to  remember  that  during  the  life  of  the  association  the 
prices  of  the  larger  nails  were  increased  even  more  by  the 
increase  of  the  extras  on  them. 

The  diagram  printed  below  shows  the  movement  during  1895 
and  1896  of  the  prices  of  8-d.  wire  nails,  of  No.  11  wire,  from 
which  these  nails  are  made,  of  wire  rods  and  of  steel  billets.  It 
is  based  upon  the  Pittsburg  quotations,  as  published  from  week 
to  week  in  the  Iron  Age.  No.  1 1  wire  costs  about  ^.10  per  cwt. 
more  than  the  base  sizes  quoted  in  the  market  reports. 

Iron  and  steel  went  through  a  notable  boom  and  collapse  in 
1895.  Without  any  marked  change  in  the  general  condition  of 
the  country,  without  any  corresponding  change  in  general  prices, 
without  any  strong  parallel  movement  in  other  countries,  the 
prices  of  crude  iron  and  steel,  and  other  prices  directly  depend- 
ent on  them,  rose  fast  and  steadily  for  some  five  months,  and  fell 
even  faster  in  the  next  three.     Between  April  i  and  September 

1  Iron  Age,  Dec.  lo,  1896,  p.  1161. 


6o 


TRUSTS,    POOLS  AND   CORPORATIONS 


15  steel  billets  rose  more  than  sixty  per  cent,  while  by  December 
1 5  they  were  within  ten  per  cent  of  the  old  level.     It  is  not  easy 


1895 


1896 


— 



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8d  wire  nails  Ky  kxxkxxkx'k  > 
No.  II  wire     


Wire  rods      iiiiiiiitiiiiiiiiitiiiiintiiH 
Steel  billets    00000    00    o 


to  get  a  fully  satisfactory  explanation  of  the  rise.     Near  the  end 
of  March  the  Carnegie  interests  contributed  to  start  it  by  very 


THE   WIRE-NAIL  ASSOCIATION    OF    1S95-96  61 

large  purchases  of  iron.  About  the  same  time  the  H,sJ3.  Frick 
Coke  Company  announced  an  advance  of  fifteen  per  cent  in 
wages,  and  an  advance  of  more  than  thirty  per  cent  in  the  price 
of  coke,  to  take  effect  April  i  ;  ^  and  other  coke  shippers  followed 
their  lead.  This  made  a  great  increase  in  the  cost  of  producing 
and  working  iron  and  steel  A  little  later  labor  disputes  threat- 
ened to  stop  production ;  and  when  they  were  settled,  it  was  by 
an  advance  of  wages.  Other  advances  were  announced  by  the 
great  steel  companies  during  May  and  June.  These  increases 
seemed  to  justify  and  to  fasten  the  higher  prices.  Men  gathered 
confidence  that  good  times  were  coming,  and  that  prices  were 
not  only  to  stay  up,  but  to  go  higher.  This  confidence,  react- 
ing, bred  demand ;  and  renewed  demand  pushed  prices  higher 
and  higher.  The  success  of  the  nail  combination,  and  the  tem- 
porary acti\'it\^  which  the  advance  in  nails  and  the  expectation 
of  advance  occasioned  in  the  market,  were  among  the  causes 
which  contributed  to  these  phenomena.  It  is  doubtful  whether 
the  rise  of  raw  material  had  the  slightest  influence  upon  the 
price  of  nails  ;  for  the  rise  of  nails  began  before  that  of  steel, 
was  eminently  artificial,  and  was  continued  after  the  raw  mate- 
rial had  sunk  nearly  to  its  former  price. 


III.    The  Interests  of  Dealers  and  Laborers 

The  undesirability,  from  the  standpoint  of  those  who  want 
to  use  nails,  of  any  restriction  upon  the  use  of  them  and  of 
having  to  pay  high  prices  to  get  them,  is  too  obvious  to  be 
insisted  on.  The  retail  hardware  dealers  suffered  with  the  con- 
sumers. Their  sales  were  curtailed,  without  a  proportionate 
increase  in  their  profit  per  pound.  They  had  to  bear  the  brunt 
of  their  customers'  complaints  about  the  price  of  nails.  They 
complained,  also,  of  the  annoyance  which  was  caused  by  the 
new  card  of  extras,  under  which  the  cheapest  nails  cost  fift}' 
cents  per  keg  more  than  the  nominal  base  price.  When  their 
customers  saw  nails  quoted  in  the  papers  at  $2.25,  it  was  hard 
to  convince  them  that  the  actual  wholesale  price  of  60-d.  spikes 

1  Iron  Age,  March  21.  1895,  p.  607. 


62  TRUSTS,   POOLS  AND   CORPORATIONS 

was  $2.75.  The  jobbers,  on  the  other  hand,  made  large  profits 
on  the  stocks  which  they  bought  before  the  pool  was  formed, 
or  soon  after ;  and  they  were  enabled,  by  the  system  of  dis- 
counts and  rebates,  which  the  manufacturers  maintained,  to 
make  at  least  their  usual  profit  on  current  purchases.  This 
policy  was  meant  to  make  the  jobbers  friendly  to  the  associa- 
tion ;  and  it  seems  to  have  been  largely  successful. 

Some  of  the  mills  showed  a  disposition  to  raise  wages  as  they 
advanced  their  prices,  and  so  to  make  some  little  division  of 
profits  with  their  men.  It  was  reported  that  one  of  the  great 
companies  gave  its  men  an  advance  of  ten  per  cent  in  June, 
1895,1  and  ten  per  cent  more  about  March  i,  iSgd;"^  that 
another  raised  wages  ten  per  cent  in  July,  1895  ;^  and  that  a 
third,  after  a  strike,  in  September,  1895,  advanced  its  wire- 
drawers  ten  per  cent  and  fifteen  per  cent,  and  its  nail-makers 
five  per  cent.*  But  the  last-mentioned  company,  which  at  its 
full  capacity  employs  about  one  thousand  hands,  at  one  time 
cut  down  its  force  to  about  three  hundred.  This  reduction  is 
proportional  to  the  reduction  of  total  sales  from  500,000  kegs 
a  month  to  150,000.  It  seems  safe  to  assume  that  the  other 
companies  must  have  made  similar  reductions.  If  half  or  two- 
thirds  of  the  laborers  were  thus  thrown  out  of  work,  they  were 
not  much  helped  by  a  small  increase  in  the  rate  of  wages  paid 
to  the  rest. 

The  restriction  of  the  employment  of  labor  did  not  stop  at 
the  nail  mills  ;  there  was  a  diffused  effect  which  was  probably 
greater,  though  it  is  less  traceable.  There  is  reason  to  believe 
that  building,  and  especially  repairing,  were  perceptibly  re- 
tarded.^ To  raise  the  retail  price  of  a  keg  of  nails,  say  from 
two  dollars  to  four,  must  under  any  circumstances  diminish  pur- 
chases to  some  extent.  The  effect  will  be  greater  if  the  circum- 
stances make  it  seem  likely  that  the  rise  is  temporary.  In  the 
present  case,  there  was  the  added  influence  of  a  lively  conviction 
of  the  buyers  that  the  manufacturers  were  trying  to  rob  them. 
If  a  man  thinks  that  an  effort  is  made  to  impose  upon  him,  he 

1  Iron  Age,  June  20,  1895,  P-  1288.  ^  Ibid.,  July  18,  1895,  p.  129. 

2  Ibid.,  March  12,  1896,  p.  656.  *  Ibid.,  Sept.  5,  1895,  p.  496. 

^  Ibid,  June  25,  1896,  pp.  1490-1493. 


THE    WIRE-NAIL   ASSOCIATION    OF    1895-96  63 

will  often  subject  himself  to  a  good  deal  of  inconve^ence,  for 
the  satisfaction  of  thinking  that  he  has  not  been  imposed  on.  '  It 
is  likely  that  thousands  of  men  did  without  improvements  which 
they  could  not  afford  to  do  without,  because  they  would  not  sub- 
mit to  what  they  regarded  as  the  arbitrary  demands  of  the  nail 
combination.  It  was,  perhaps,  in  part  because  the  manufac- 
turers left  this  moral  effect  out  of  their  reckoning,  that  the  extent 
of  the  diminution  of  demand  took  them  by  surprise.  Their 
calculations  doubtless  accorded  with  the  view  recently  expressed 
by  a  small  manufacturer,  who  experienced  a  strong  demand 
while  the  association  lasted,  because  he  sold  nails  a  little  under 
the  association  price.     He  said  : 

I  do  not  think  that  the  high  price  of  nails  restricted  consumption  to  any 
perceptible  extent.  The  item  of  nails  in  the  cost  of  building  is  a  very 
small  one,  and  it  was  not  over  five  or  six  years  ago  that  the  price  was 
about  the  same  as  that  fixed  by  the  recent  combination. 

Consumption  was  not  so  small  as  production  during  the  last 
months  of  1895,  or  perhaps  during  the  early  months  of  1896, 
while  the  jobbers  still  had  some  part  of  the  stocks  which  they 
had  laid  in  about  the  time  the  pool  was  formed.  But  the  best 
information  obtainable  makes  it  appear  that,  during  1896,  con- 
sumption as  well  as  production  must  have  been  small  beyond 
any  possible  expectation. 

IV.     The  Interest  of  the  Manufacturers 

It  is  apparently  the  general  opinion  that,  quite  aside  from 
any  consideration  of  the  public  welfare,  and  looking  only  to  the 
pecuniary  interest  of  the  manufacturers,  the  combination  car- 
ried the  policy  of  high  prices  too  far.  The  association  went  to 
pieces  after  eighteen  months,  and  prices  went  down  to  their 
former  level ;  therefore  it  is  assumed  that  the  combination  failed 
or,  at  least,  that  it  would  have  accomplished  its  purpose  more 
fully  by  a  more  moderate  policy.  The  matter  does  not  seem  to 
me  so  simple.  Mr.  Parks,  who  was  undoubtedly  the  guiding 
spirit  in  the  whole  transaction,  went  into  it  with  eyes  very  wide 
open.  He  had  already  been  connected  with  several  tack  com 
binations  managed  on  the  same  principles.     Of  course  they  came 


64  TRUSTS,   POOLS  AND   CORPOEATIONS 

to  a  rather  speedy  end ;  but  Mr.  Parks  seems  to  have  counted 
their  experience  as  favorable,  on  the  whole,  to  the  policy  of  a 
short  life  and  a  merry  one  for  pools.  Moreover,  he  still  main- 
tains the  wisdom  of  the  course  that  he  counselled.  When  the 
association  collapsed,  he  said  that  it  had  lived  longer  than  its 
most  sanguine  promoters  expected,  and  as  a  financial  undertak- 
ing had  been  an  unprecedented  success.^  The  manner  of 
argument  of  a  man  who  was  connected  with  the  association 
throughout  its  existence  is  as  follows : 

Suppose  we  had  put  up  the  price  ^.15  a  keg.  A  great  many  men  who 
had  had  their  eye  on  the  nail  business,  would  have  said  :  "  Those  men 
have  put  up  the  price  $.15,  and  they  will  probably  make  it  $.25.  There 
is  going  to  be  money  in  the  nail  business.  I  will  go  in."  But  when  we 
put  up  the  price  $1.50,  they  said  :  "Those  fellows  are  lunatics.  They 
can't  hold  together.  There  will  be  a  smash  before  they  get  fairly  started. 
I  will  keep  out  of  that  business."  As  a  matter  of  fact,  we  had  hardly 
any  new  competition  during  the  first  year  of  the  association.  The  new 
competition  came  mosdy  after  the  beginning  of  the  second  year.  Then 
men  began  to  say  :  "  Those  fellows  have  kept  together  twelve  months, 
and  they  will  probably  do  it  a  while  longer.  They  are  making  a  lot  of 
money.  I  will  try  to  get  a  slice  of  it."  I  am  sure  we  kept  the  associa- 
tion going  longer  with  a  high  price  than  we  could  have  kept  it  going  with 
a  low  price.  I  don't  believe  it  would  have  lasted  six  months  with  a  raise 
of  $.25.  The  high  price  frightened  off  some  people,  and  gave  us  plenty 
of  money  to  buy  off  the  rest. 

It  is  hardly  possible  to  over-emphasize  the  distinction  between 
the  great  consolidations  of  which  the  so-called  sugar  trust  may 
be  taken  as  a  type — consolidations  which  it  may  not  be  improper 
to  distinguish  specifically  as  trusts,  because  the  typical  examples 
were  first  united  under  the  proper  trust  form  of  organization  — 
and  pools  Hke  the  nail  association.  The  broad  differences  of  or- 
ganization have  their  root  partly  in  the  conditions  of  the  businesses 
concerned,  and  partly,  it  may  be,  in  the  mental  characteristics 
of  the  managers ;  and  they  issue  in  great  differences  of  policy 
and  power.  It  would  probably  not  be  impossible  to  bring  the 
making  of  wire  nails  under  the  control  of  one  great  company  ; 
but  it  would  be  much  more  diflScult  than  it  was  to  do  the  like 

1  Iron  Age,  Dec.  3,  1896,  p.  1108. 


THE   WIRE-NAIL  ASSOCIATION    OF    1895-96  65 

with  the  refining  of  sugar.  To  refine  sugar  by  methods  com- 
mercially practicable  to-day,  a  man  must  have  hundreds  of  thou- 
sands of  dollars  to  put  at  the  risk  of  the  business.  With  ten 
thousand  dollars  and  six  weeks'  time,  however,  any  man  who 
likes  can  become  a  manufacturer  of  wire  nails.  A  little  factory 
can  make  them,  not  quite  so  cheaply  as  the  great  establishments 
which  make  their  own  wire,  but  at  no  very  great  disadvantage. 
It  needs  only  a  small  rise  above  the  lowest  price  at  which  the 
best  mills  can  pay  interest  on  the  cost  of  their  plants,  to  enable 
an  indefinite  number  of  small  mills  to  start,  making  each  its 
twenty-five  or  fifty  kegs  per  day.  This  is  the  weakness  of  any 
form  of  combination  in  a  business  of  this  character  —  the  pos- 
sibility of  a  new  factory  in  every  thriving  town. 

No  limit  can  be  named  to  the  success  of  skilful  and  deter- 
mined managers  of  a  centralized  combination  or  trust,  in  any 
line,  in  crushing  competition.  An  abnormal  lowering  of  price 
in  the  local  field  of  a  small  competitor  is  a  weapon  which  needs 
nothing  but  persistence  to  make  it  inevitably  fatal  to  him; 
and  the  revenues  which  the  trust  draws  constantly  from  other 
fields,  even  if  it  loses  in  the  region  of  cut  prices,  give  it  an 
unlimited  power  of  persistence.  There  is  no  doubt  of  the 
trust's  abihty  to  destroy  any  competitor  of  a  size  which  does  not 
approach  its  own.  This  process  is  troublesome,  however,  and 
somewhat  expensive ;  and  in  a  case  in  which  new  competitors 
can  spring  up  with  so  little  money  and  in  so  short  a  time,  the 
query  is  whether  the  situation  of  the  trust  would  not  be 
unpleasantly  Hke  that  of  a  man  fighting  with  mosquitoes. 

It  probably  would  be  so,  unless  the  trust  should  be  content 
with  a  policy  of  greater  moderation  in  its  profits  than  any  trust 
has  yet  had  the  self-denial  to  adopt.  Any  trust,  having  once 
got  control  of  the  market,  could  make  it  impossible  for  any 
competitor  to  establish  a  business  which  would  pay  a  profit  for 
a  day,  or  would  need  any  attention  from  the  trust  to  make  it 
disappear.  This  possibility  depends  upon  the  power  of  the 
trust  to  do  for  society  such  service  as  no  competitor  could  do. 
The  representatives  of  the  trusts  have  not  been  negligent  in 
setting  forth  the  economies  which  they  are  able  to  effect :  the 
production  of  all  goods  by  the  most  efiQcient  plants;  the  uni- 


66  TRUSTS,   POOLS  AND   CORPOR.\TIONS 

versal  use  of  all  improvements,  patented  or  not;  the  econo- 
mizing and  full  use  of  expert  knowledge;  the  incorporation  of 
subsidiary  industries,  Hke  the  making  of  packages ;  the  saving 
of  transportation  by  shipping  from  the  factory  nearest  the  con- 
sumer. Greatest  of  all,  perhaps,  and  most  decisive,  because  it 
is  the  economy  that  is  absolutely  out  of  the  reach  of  a  competi- 
tor, is  the  commercial  economy  that  depends  upon  the  control 
of  the  market  —  the  saving  of  the  expense  of  inducing  cus- 
tomers to  buy  of  this  concern  and  not  of  that.  A  trust  which 
should  make  over  the  greater  part  of  these  savings  to  its  cus- 
tomers, and  should  content  itself  with  prices  which  would  give 
it  only  fifteen  or  twenty  per  cent  per  annum  on  the  value  of  its 
productive  property,  as  measured  by  the  cost  of  replacing  it, 
would  probably  never  be  troubled  with  any  shadow  of  competi- 
tion. But  the  general  conclusion  of  competent  and  disinterested 
investigators  seems  to  be  that,  up  to  the  present  time,  every 
trust,  when  its  control  of  the  market  has  been  established,  has 
not  only  kept  the  whole  of  the  savings  of  consolidation  to 
itself,  but  has  taken-  from  the  public  something  besides,  making 
prices  somewhat  higher  than  they  would  have  been  under  full 
competition. 

The  form  of  organization  of  a  pool  is  less  unattractive  than 
that  of  a  full  consoHdation,  to  a  man  who  values  his  indepen- 
dent position  and  dislikes  to  become  an  employee;  but  there 
is  in  it  as  much  less  power  as  there  is  less  unity.  Under  a  pool, 
the  economy  of  closing  some  establishments  may  be  effected 
by  paying  them  a  bonus,  as  was  done  for  years  by  the  steel-rail 
pool.  The  nail  men  dealt  with  outside  mills  by  this  plan,  but 
under  circumstances  and  in  a  way  which  hardly  permit  it  to  be 
regarded  as  an  economy.  It  is  probable  that  a  pool,  with  pro- 
duction strictly  limited  to  what  the  market  will  easily  absorb  at 
the  prices  fixed,  might  make  some  saving  in  the  commercial 
expenses  of  advertising  and  selling,  particularly  if  the  circum- 
stances and  the  policy  of  the  pool  were  such  as  to  give  it  a 
character  of  comparative  permanence.  The  nail  men  were 
probably  not  able  to  make  any  savings  of  this  class.  The 
other  economies  which  are  possible  to  a  trust  seem  to  be  out 
of  the  reach  of  a  pool,  while  the  central  organization  and  the 


THE   WIRE-NAIL   ASSOCIATION    OF    1895-96  6j 

system  of  mutual  watching  seem  even  to  add  soiaa^ithing  to 
the  cost  of  superintendence.  It  is  probably  safe  to  say  that 
nearly  all  the  gain  which  any  manufacturers  may  make  through 
a  pool  is  made  by  raising  their  selling  prices. 

It  can  be  maintained  with  a  good  show  of  reason  that  the 
nail  men  would  have  got  more  profit  in  the  course  of  years  from 
the  policy  of  full  consolidation,  with  prices  permanently  fixed 
low  enough  to  make  competition  impossible.  But  experience 
has  not  yet  shown  this  policy  to  be  practically  attainable  in  our 
present  stage  of  civilization.  Between  that  extreme  and  the 
other,  which  the  nail  men  chose,  it  is  doubtful  whether  there  is 
any  mean  which  they  would  have  found  golden.  The  choice 
practically  open  to  them  appears  to  have  lain  between  a  tolera- 
bly large  profit,  which  might  possibly  last  two  or  three  years, 
and  a  very  large  one,  which  might  be  expected  to  last  six  months 
or  a  year.  They  chose  the  very  large  one  ;  and  they  kept  it,  or 
at  least  kept  the  price  up,  for  eighteen  months.  It  is  true  that 
a  very  large  part  of  the  profits,  especially  in  the  later  months, 
was  consumed  in  subsidies  and  other  expenses  of  the  association. 
Some  well-informed  men,  intimately  connected  with  the  trade 
and  friendly  to  the  manufacturers,  think  that  their  policy  was 
short-sighted.  The  question  has  more  sides  than  one,  how- 
ever, and  it  seems  possible  to  make  out  a  very  good  case  for  the 
view  that  the  manufacturers  did  not  choose  the  least  profitable 
course. 

V.     The  Interest  of  the  Public 

It  may  not  make  much  difference  to  the  manufacturer  whether 
he  reduces  his  costs  or  raises  his  selling  price ;  but  it  makes  a 
great  difference  to  the  consumer.  Aside  from  any  lowering  of 
prices,  it  is  to  the  public  interest  that  economies  be  made  —  that 
a  given  product  be  obtained  with  less  cost  and  less  exertion.  If 
a  consolidated  trust  would  sell  as  cheaply  as  competing  producers 
would  have  to  sell,  keeping  to  itself  the  whole  of  its  economies 
but  taking  nothing  more,  the  economies  would  benefit  the  public 
somewhat  in  the  end.  The  production  of  wealth  and  the  sum 
of  capital  are  certainly  increased  by  them ;  and  such  increase  of 


68  TRUSTS,    POOLS   AND    CORPORATIONS 

capital  and  of  production  tends  in  itself  to  the  general  good.  The 
actual  policy  of  the  trusts,  in  taking  from  the  public  something 
in  higher  prices  besides  their  gain  through  saving,  complicates 
the  question  ;  but  there  is  a  very  considerable  gulf  between  the 
effects  of  a  trust,  like  the  American  Sugar  Refining  Co.,  and  the 
effects  of  a  pool,  like  the  Nail  association.  The  actual  lessen- 
ing of  the  human  effort  that  is  required  for  a  given  result  does 
accompany  the  trust,  and  we  all  are  privileged  at  least  to  cherish 
the  pious  hope  that  some  small  fraction  of  the  gain  may  ulti- 
mately work  its  way  around  to  us.  The  pool,  on  the  other  hand, 
does  not  effect  any  saving  of  human  effort.  Its  avowed  purpose 
is  to  increase  its  members'  share  of  the  products  of  such  effort. 
Its  form  of  organization  is  probably  incapable  of  producing  the 
greater  part  of  the  social  benefits  which  the  trusts  lay  claim  to ; 
and  it  does  not  make  much  pretence  of  trying  to  produce  them. 
The  claim  of  the  trusts  to  a  socially  desirable  effect  on  price 
takes  two  forms  —  that  they  make  prices  lower  and  that  they 
make  them  steadier.  The  former-  effect  has  probably  not 
appeared  permanently  in  any  instance ;  and  the  latter  does  not 
seem  to  have  appeared  generally.  Both  effects  are,  however, 
within  their  power.  Unsteadiness  of  price,  so  far  as  it  results 
from  the  action  of  trusts  which  have  once  established  their  con- 
trol of  the  market,  is  generally  the  result  of  high  prices.  The 
raising  of  prices  above  the  competitive  level  causes  competition 
to  develop ;  and  competition  can  be  dislodged  only  by  buying 
it  out  or  by  sinking  prices  below  the  competitive  level.  The 
trusts  are  regarded  by  their  managers  as  permanent  institutions, 
and  they  tend  toward  the  policy  which  the  managers  think  likely 
to  bring  the  greatest  net  revenue  in  the  long  run.  They  tend 
toward  a  comparatively  moderate  forcing  of  present  profits,  with 
a  fair  degree  of  attention  to  the  future.  In  consequence,  if  the 
prices  of  their  goods  are  not  steadier  than  they  would  be  under 
full  competition,  they  are  probably  not  much  less  steady.  The 
nail  pool,  on  the  other  hand,  was  an  ephemeral  thing,  designed 
for  a  quick  rush  into  the  market,  a  grasping  of  whatever  gains 
might  be  within  reach,  and  then  —  collapse.  Its  purpose  was 
that  of  a  corner  —  to  get  the  greatest  possible  amount  of  profit 
out  of  those  who  had  to  have  nails  within  a  limited  time.     Its 


THE   WIRE-NAIL  ASSOCIATION    OF    1895-96  69 

effect,  therefore,  was  a  great  exaggeration  of  the  nornaaJ-un steadi- 
ness of  prices. 

Too  great  productive  capacity  is  one  of  the  reasons  which 
are  regularly  given  for  forming  combinations.  The  providing 
of  machinery  for  making  far  more  goods  than  are  demanded  at 
the  necessary  prices  is  one  of  the  wastes  of  competition.  Of 
course  it  would  not  be  practicable,  with  the  completest  centrali- 
zation, to  keep  the  nominal  capacity  of  machinery  down  to  the 
actual  demand ;  for  variations  in  the  quantities  demanded,  vari- 
ations in  the  kinds  demanded,  the  necessity  of  being  able  to 
make  many  kinds  at  each  of  several  places  —  all  forbid  an  exact 
adjustment.  There  is  no  doubt,  however,  that  here  a  trust  can 
effect  a  saving  over  competitive  methods,  though  it  may  nullify 
this  benefit  more  or  less  completely  by  stimulating  new  compe- 
tition through  too  high  prices.  The  policy  of  the  nail  pool,  on 
the  other  hand,  greatly  stimulated  the  tendency  to  the  over- 
production of  machinery.  The  association  tried  to  check  it  by 
subsidies  to  machinery-makers,  but  with  only  partial  success. 
Such  makers  of  nail  machinery  as  would  accept  orders  were 
overwhelmed  with  them.  It  was  said  that  persons  anxious  to 
get  into  the  nail  business  "  overbid  each  other,  and  lucky  buyers 
of  machines  were  offered  premiums  for  their  bargains."  ^  When 
the  pool  collapsed,  the  machines  which  the  artificially  stimulated 
demand  had  called  forth  became,  for  the  most  part,  dead  prop- 
erty. Both  to  the  owners  and  to  society,  they  are  an  almost 
entire  waste  of  capital. 

In  this  way  the  pool  aggravated  one  of  the  fundamental  diffi- 
culties of  the  situation  which  it  was  formed  to  change.  This 
is,  perhaps,  its  most  visibly  lasting  effect,  and  from  it  a  serious 
obstacle  arises  in  the  way  of  renewing  the  pool.  So  far  as  their 
current  business  is  concerned,  the  manufacturers  might  have 
been  in  no  very  different  position  if  the  pool  had  not  been 
formed.  The  price  of  nails  is  now  about  the  same,  allowing 
for  the  change  of  extras,  as  in  the  spring  of  1895.  Of  the 
hundreds  of  new  machines  which  were  set  up  during  the  eigh- 
teen months  of  fever,  a  large  part  have  ceased  to  turn  out  nails, 
and  as  the  months  go  by,  others  will  cease.     Some  of  the  older 

^  Iron  Age,  Dec.  10,  1896,  p.  1147. 


70  TRUSTS,    POOLS   AND    CORPORATIONS 

and  less  efficient  will  go,  one  by  one,  to  the  scrap  pile,  and  some 
of  the  newer  may  replace  them.  With  the  continued  progress 
of  invention  the  rest  will  doubtless  grow  relatively  less  and  less 
efficient.  The  growth  of  the  country,  too,  will  make  a  fixed 
number  of  machines  continually  less  important  as  a  possible 
factor  in  the  market.  These,  however,  are  processes  of  years. 
For  a  long  time  to  come  the  hundreds  of  machines  which  stand 
ready  to  start  at  a  week's  notice  must  be  reckoned  with  by  any 
new  combination.  A  small  manufacturer,  who  was  not  in  the 
pool,  wrote  in  February,  1897  :  "I  doubt  if  there  will  be  another 
combine  for  a  year,  but  I  think  it  will  ultimately  come."  It  will 
come,  as  surely  as  seedtime  and  harvest ;  but  not  in  one  year, 
nor,  in  all  probability,  in  two.  It  will  probably  not  be  possible, 
until  several  years  have  gone  by,  to  form  another  association 
which  shall  effectively  control  the  market. 


VI.     Conclusions 

Only  two  rather  small  classes  are  probably  ready  to  give 
thanks  for  the  concentrations  of  industrial  and  social  power 
which  are  loosely  covered  by  the  name  of  trusts  —  those  who 
draw  wealth  and  power  from  them,  and  those  who,  desiring  a 
general  absorption  of  the  control  of  production  by  society,  think 
that  the  trusts  are  forwarding  their  aim  ;  and  some  of  the  former 
class  perhaps  would  not  give  thanks  without  certain  baitings  of 
conscience,  while  many  of  the  latter  account  the  case  as  one  of 
those  in  w^hich  God  makes  the  wrath  of  man  to  praise  him.  But 
an  unfavorable  judgment  of  the  economic  and  social  effects  of 
an  institution  does  not  at  all  involve  an  unfavorable  ethical  judg- 
ment of  the  men  who  visibly  represent  it  — at  least  in  compari- 
son with  the  rest  of  the  community.  The  members  of  the  Nail 
association  did  what  the  rest  of  us  would  have  done  in  their 
places.  One  who  was  active  in  forming  the  association  gives 
this  statement  of  their  point  of  view: 

There  is  nail  machinery  enough  in  this  country  to  produce  four  times 
as  many  nails  as  can  be  sold.  When  there  is  no  pool  the  makers  simply 
cut  each  other's  throats.     Some  people  think  there  is  something  wicked 


THE   WIRE-NAIL   ASSOCIATION    OF    1895-96  71 

about  pools.  When  we  were  trying  to  get  up  the  nail  p©«l,  I  talked 
with  directors  of  companies  who  held  up  their  hands  against  going  into 
any  sort  of  combination.  I  said  to  them,  "  How  much  did  you  make 
last  year  ?"  "Not  a  cent."  "Are  you  making  anything  now  ?"  "No." 
"  Well,  what  do  you  propose  to  do  ?  Sit  here  and  lose  what  capital  you 
have  got  in  the  business  ?  "  Some  of  them  thought  they  could  run 
along  until  some  of  the  weak  concerns  died  off.  But  I  tell  you  plants 
don't  die.  If  a  concern  fails,  they  reorganize  it.  They  buy  in  the  plant 
cheap,  they  have  got  rid  of  the  old  debts,  and  they  are  in  better  shape 
to  compete  than  ever.  There  is  only  one  way  to  make  any  money  in  a 
business  like  the  nail  business,  and  that  is  to  have  a  pool. 

This  is  the  aspect  that  things  would  wear  to  us  if  we  were  in 
the  position  of  the  manufacturers.  Some  of  us  are  perhaps 
opposed  to  combinations ;  but  so  were  some  that  went  into  the 
nail  pool.  In  weighing  any  man's  opposition  to  combinations, 
it  may  be  doubted  whether  it  is  of  the  sort  to  keep  him  out  of 
them,  till  he  has  sailed  the  strait  between  failing  profits  and  the 
trust,  and  has  passed  the  siren  voice. 

The  trusts  simply  do,  with  larger  resources  and  higher  organi- 
zation, the  things  that  every  manager  of  a  competitive  business 
is  trying  to  do.  It  is  possible  that  we  see  the  character  of  such 
things  better  when  they  are  done  on  the  larger  scale ;  it  may  be 
one  of  the  missions  of  the  trusts  to  give  us  clearer  and  higher 
notions  of  ethics.  But  it  seems  probable  that,  if  we  begin  to 
cast  stones,  the  houses  of  the  trusts  will  not  be  the  only  ones  to 
suffer.  If  it  is  asserted  to  be  wrong  to  crowd  up  the  prices 
of  the  things  we  sell  and  to  crowd  dov^n  the  prices  of  things  we 
buy,  wrong  to  make  our  business  large  by  the  destruction  of  our 
neighbor's,  a  good  deal  may  be  said  for  the  ethical  superiority 
of  the  altruistic  man  who  should  refuse  to  do  these  things;  but  no 
ethical  distinction  can  be  drawn  between  the  man  who  does  them 
strongly  and  successfully  and  the  man  who  is  only  able  to  do 
them  with  less  strength  and  less  success. 

The  mechanism  of  the  trust,  properly  so  called,  is  perhaps 
not  unworthy  to  be  ranked  among  the  greatest  inventions  of 
this  century,  either  as  a  monument  of  intellectual  acuteness  or 
as  an  engine  of  momentous  social  effects.  Like  most  of  those 
other  inventions  which  are  more  unanimously  classed  as  useful, 


72  TRUSTS,    POOLS   AND    CORPORATIONS 

and  for  which  individuals  get  credit,  the  invention  of  the  trusts 
did  not  really  depend  on  the  activity  of  any  particular  men.  If 
neither  Bell,  nor  Reis,  nor  McDonough,  nor  Edison  had  lived, 
a  score  of  other  men  were  looking  for  the  telephone,  and  would 
soon  have  discovered  it.  Scientific  and  technical  knowledge  had 
reached  a  point  from  which  it  could  not  but  be  discovered;  and 
no  man  could  do  more  than  hasten  the  discovery  by  a  little. 
Just  so,  the  development  of  the  pool,  the  trust,  and  the  giant 
consolidated  corporation  was  inevitable  in  the  social  and  eco- 
nomic conditions  of  our  age.  If  the  world  had  lacked  Mr. 
Rockefeller  and  his  associates,  it  had  other  men  of  business 
and    other    lawyers ;    and   it  would  not  long  have   lacked   the 

trust.  ^  „    „ 

Charles  E.  Edgerton 


OTHER    IRON   AND    STEEL   POOLS  ^ 

Tile  Stccl-Rail  Pool}  —  By  far  the  most  important  pool  organ- 
ization in  the  steel  industry  at  this  time  was  that  in  steel  rails. 
This  pool  was  formed  on  August  2,  1887,  and,  while  it  was  dis- 
solved in  1893,  it  was  speedily  renewed  and  continued  in  exist- 
ence until  the  early  part  of  1897.  The  general  nature  of  this 
pool  may  perhaps  best  be  indicated  by  reproducing  the  follow- 
ing copy  of  the  memorandum  of  agreement  : 

Memorandum  of  agreement,  entered  into  August  2,  1887,  by  and 
between  the  North  Chicago  Rolling  Alill  Company,  the  Cam- 
bria h'on  Company,  the  Pennsylvania  Steel  Company,  etc., 
etc. 

We,  the  before-named  companies  and  corporations,  manufacturers 
of  steel  rails,  hereby  mutually  agree  one  with  the  other,  that  we  will 
restrict  our  sales  and  the  product  of  steel  rails  of  50  pounds  to  the 
yard  and  upward,  applying  to  orders  taken  by  us  and  to  be  delivered 
by  us  or  from  our  respective  works  during  the  year  1888,  as  hereinafter 

^  U.  S.  Bureau  of  CorpoTations,  Report  on  Steel  Industry,  July  i,  191 1,  pp.  69-74; 
Stevens,  op.  cit. ;  the  Stanley  Committee  Congressional  Investigation  Hearings,  62nd 
Cong.,  2d  sess.,  1911-12;  and  U.  S.  v.  U.  S.  Steel  Corporation,  Statement  of  the 
Case,  pp.  260-343;  give  more  details.  On  the  so-called  "Gary  dinners,"  details  are 
given  in  the  next  chapter,  p.    178  et  seq. 


THE   WIRE-NAIL   ASSOCIATION    OF    1895-96  73 

allotted  and  limited  ;  and  we  respectively  bind  ourselves  n^Uo  sell  in 
excess  of  our  current  allotments,  without  first  obtaining  the  consent  of 
the  Board  of  Control  thereto  —  that  is  to  say : 

It  is  agreed,  there  shall  now  be  made  an  allotment  of  800,000  tons 
of  rails,  which  shall  be  divided  and  apportioned  to  and  among  the 
several  parties  hereto  to  be  sold  by  them  during  the  year  1888,  upon 
the  following  basis  of  percentages,  to  wit :  North  Chicago  Rolling 
Mill  Company,  la^-  per  cent;  Pennsylvania  Steel  Company,  9^%  per 
cent ;  etc.,  etc. 

And  in  addition  to  the  said  allotment  of  800,000  tons  of  rails  above 
allotted,  an  additional  allotment  of  250,000  tons  is  hereby  made  and 
allotted  to  the  Board  of  Control,  to  be  reallotted  and  reapportioned  by 
it,  as  and  to  whom  it  may  deem  equitable,  in  the  adjustment  of  any 
differences  that  may  arise.  It  being  also  further  agreed  that  all  sub- 
sequent allotments  of  rails  hereafter  made,  to  be  sold  under  this 
agreement  during  the  year  1888,  shall  also  be  divided  and  apportioned 
to  the  several  parties  hereto  in  the  same  ratio  of  percentages  as  said 
apportionment  of  800,000  tons  is  herein  divided  and  apportioned. 

It  is  further  agreed,  that  the  Board  of  Control  shall,  from  time  to 
time,  make  such  further  allotments  as  shall  be  necessary  to  at  all 
times  keep  the  unsold  allotments  at  least  200,000  tons  in  excess 
of  the  total  current  sales,  as  shown  by  the  monthly  reports  of  sales. 
This  is  to  be  in  addition  to  the  then  unappropriated  part  of  the 
250,000  tons  hereinbefore  alloted  to  the  Board  of  Control  to  adjust 
differences. 

It  is  further  agreed,  on  the  first  day  of  April,  July  and  October,  the 
Board  of  Control  are  authorized  and  directed  to  cancel  such  part  of 
the  unmade  allotments  of  the  respective  parties  hereto  as  they  the 
said  Board  of  Control  shall  determine  such  party  unable  to  make  in 
due  time,  and  all  allotments  so  canceled  the  Board  of  Control  shall 
have  the  right  to  reallot  to  any  of  the  other  parties  hereto  ;  it  being 
understood  that  all  such  cancellations  shall  apply  only  to  allotments 
standing  to  the  credit  of  the  respective  parties  hereto  on  the  dates 
above  named,  but  no  reallotment  as  aforesaid  shall  be  made  by  the 
Board  of  Control  to  any  of  the  parties  hereto  for  the  purpose  of  en- 
abling them,  or  any  of  them,  to  make  and  sell  rails  from  foreign  made 
blooms. 

It  is  further  agreed,  that  all  transfers  of  parts  of  allotments  from 
one  party  to  another  shall  be  made  by  the  Board  of  Control. 

It  is  further  agreed,  that  there  shall  be  a  Board  of  Control,  consist- 
ing of  three  members,  namely,  Orrin  W.  Potter,  Luther  S.  Bent  and 


74  TRUSTS,    POOLS   AND    CORPORATIONS 

W.  W.  Thurston,  who  shall  have  power  to  employ  a  paid  secretary 
and  treasurer. 

It  is  further  agreed,  that  the  Board  of  Control,  upon  the  written 
consent  of  75  per  cent  of  the  percentages  as  hereinbefore  named, 
shall  increase  the  allotments  for  the  year  1888,  and  such  increase 
§hall  be  allotted  to  the  parties  hereto  as  hereinbefore  provided. 

It  is  further  agreed,  that  each  party  whose  name  is  hereunto 
annexed,  shall  and  will  make  monthly  returns  to  the  Board  of  Control 
of  all  contracts  for  delivery  of  rails  of  50  pounds  to  the  yard  and  up- 
ward during  the  year  1888,  and  also  of  all  shipments  of  such  rails 
made  by  them  during  said  year ;  a  copy  of  such  return  shall  be  fur- 
nished to  each  party  hereto. 

It  is  further  agreed,  that  all  the  parties  hereto  shall  and  will,  on  or 
before  January  15,  1888,  make  a  written  return  to  the  Board  of  Con- 
trol of  all  rails  of  50  pounds  to  the  yard  and  upward  (designating  the 
weight)  which  they  respectively  had  on  hand  January  i,  1888,  stating 
whether  the  same  are  sold,  and  if  sold,  on  what  order  they  apply. 

It  is  further  agreed,  that  the  Board  of  Control  shall  have  the  right 
whenever  they  deem  it  expedient  to  convene  a  meeting  of  the  parties 
hereto,  and  they  shall  give  at  least  10  days'  previous  notice  of  all  meet- 
ings, and  any  business  transacted  at  such  meetings,  and  receiving  75 
per  cent  of  the  votes  present  thereat,  either  in  person  or  by  proxy, 
shall  be  binding  on  all  the  parties  hereto,  excepting  as  to  a  change  in 
percentages  as  aforesaid. 

The  Board  of  Control  shall  be  required  to  call  a  meeting  of  the 
parties  hereto  when  requested  so  to  do  in  writing,  signed  by  any  three 
of  the  contracting  parties,  but  such  request  and  such  notice  shall  state 
the  object  for  which  such  meeting  is  called. 

It  shall  be  the  duty  of  the  Board  of  Control  to  have  a  proper  record 
kept  of  all  the  returns  made  to  it,  with  power  from  time  to  time  to 
change  the  form  of  return  as  they  may  deem  expedient. 

The  Board  of  Control  shall  have  authority  to  levy  an  assessment, 
pro  rata  to  the  allotted  tonnage,  to  defray  the  actual  expenses  made 
necessary  to  carry  out  this  agreement. 

It  is  further  agreed,  that  we  will,  respectively,  immediately  make 
return  to  the  Board  of  Control  of  all  rails  of  50  pounds  to  the  yard 
and  upward  which  we  are  now  under  contract  to  deliver  during  the 
year  1888,  said  return  to  state  to  whom  such  rails  are  sold  and  when 
they  are  to  be  delivered. 

North  Chicago  Rolling  Mill  Company,  by  O.  W.  Potter,  president ; 
Cambria  Iron  Company,  by  E.  Y.  Townsend,  president ;  etc.,  etc. 


THE   WIRE-NAIL   ASSOCIATION    OF    1895-96  75 

This  agreement,  it  will  be  seen,  was  designed  to  j)rovide  a 
very  effective  control  of  the  production  of  steel  rails  by  members 
of  the  pool,  who  together  manufactured  at  that  time  more  than 
90  per  cent  of  the  country's  output. 

The  distinguishing  characteristics  of  the  rail  pool  were  a 
fairly  compact  organization  and  the  inclusion  of  nearly  all  rail 
manufacturers,  while  the  rather  extensive  plant  necessary  for 
the  production  of  rails  tended  to  discourage  new  competition. 
The  bulk  of  railroad  purchases  of  steel  rails,  moreover,  are 
usually  made  once  a  year.  These  conditions  favored  the  main- 
tenance of  pool  prices  and  probably  explain  the  stability  of  this 
pool  as  compared  with  others  in  the  iron  and  steel  industry  at 
this  period. 

However,  the  rail  pool  was  by  no  means  completely  success- 
ful. Despite  its  fairly  compact  organization,  it  collapsed  in  the 
latter  part  of  1893  as  a  result  of  disagreements  over  the  allot- 
ment of  tonnage,  aggravated  by  the  commercial  depression  of 
that  year.  In  1894,  after  numerous  conferences,  it  was  reor- 
ganized, but  the  slack  demand  of  1896  resulted  in  new  infrac- 
tions of  the  agreement,  as  a  result  of  which  the  pool  collapsed 
in  February,  1897.  This  second  disruption  of  the  pool  was 
followed  by  a  brief  but  exceedingly  bitter  price  war,  during 
which  sales  of  steel  rails  were  made  freely  at  prices  ranging 
from  $20  to  $15  per  ton.  The  nominal  pool  price  of  rails  had 
for  some  time  been  $28. 

The  Steel-billet  P^^/.  — This  pool  was  formed  in  April,  1896, 
under  the  name  of  "The  Bessemer  Steel  Association  of  the 
United  States."  The  agreement,  which  was  along  the  same 
lines  as  that  of  the  steel-rail  pool,  provided  for  a  definite  allot- 
ment of  tonnage  among  the  members,  the  maintenance  of  prices, 
the  payment  of  penalties  for  exceeding  the  tonnage  allotments, 
and  compensation,  on  the  other  hand,  to  those  members  who 
did  not  make  the  maximum  production  to  which  they  were  en- 
titled. 

The  billet  pool  had  a  stormy  existence  from  the  start.  This 
was  due  partly  to  the  fact  that  it  failed  to  include  several  im- 
portant manufacturers  of  billets,  but  more  particularly  to  in- 
ternal dissensions.     An  especial   source  of  weakness  was  that 


^6  TRUSTS,    POOLS   AND    CORPORATIONS 

while  some  of  its  members  made  nothing  but  the  cruder  steel 
products,  such  as  billets,  slabs,  etc.,  and  were  therefore  depend- 
ent upon  the  outside  market,  several  of  the  larger  concerns  in 
the  pool  had  their  own  finishing  mills,  which  thus  afforded  them 
an  outlet  for  a  large  quantity  of  their  semifinished  steel.  The 
agreement  as  originally  drawn  up  did  not  cover  billets  thus  used 
by  pool  members  themselves  in  the  manufacture  of  finished 
products.  As  a  result,  such  concerns  took  advantage  of  the 
situation  by  entering  into  heavy  sales  of  finished  material,  and 
at  prices  so  low  that  outside  finishing  mills  were  unable  to  com- 
pete and  at  the  same  time  pay  the  pool  price  of  billets.  Con- 
sequently there  was  a  heavy  reduction  in  the  trade  demand  for 
billets,  and  those  members  of  the  pool  who  were  dependent 
upon  this  outside  demand  naturally  became  intensely  dissatisfied. 
As  a  result  of  these  conditions,  the  pool  was  apparently  on  the 
point  of  disruption  during  the  summer  and  fall  of  1896.  In 
November  the  arrangement  was  amended  by  including  in  the 
tonnage  allotment  steel  used  by  pool  members  in  the  manufac- 
ture of  finished  material  as  well  as  that  sold  in  the  cruder  forms. 
This  change,  however,  had  hardly  been  accomplished  when 
fresh  difficulties  arose  over  alleged  bad  faith  of  some  of  the 
members.  In  the  first  week  of  December,  1896,  one  member  of 
the  pool,  the  Bellaire  Steel  Company,  formally  announced  its 
withdrawal.  This  action  was  promptly  followed  by  the  collapse 
of  this  pool. 

The  Ore  Pool.  —  This  pool,  which  was  called  the  Bessemer 
Ore  Association,  embraced  the  leading  ore-producing  interests 
in  the  Lake  Superior  region.  The  keen  competition  which  or- 
dinarily exists  in  a  mining  business  where  ownership  of  ore 
properties  is  scattered  was  intensified  by  the  commercial  panic 
of  1893,  and  profits,  for  many  mining  concerns,  had  practically 
disappeared.  The  pool  agreement  contemplated  a  rigid  control 
of  the  business.  Aside  from  fixing  prices  for  ores,  it  also  under- 
took to  make  a  definite  allotment  of  production,  both  as  to 
mining  ranges  or  districts  and  also  as  to  the  individual  mining 
companies  included  in  its  membership. 

Owing  to  important  changes  in  the  ore  industry  in  1896, 
some  of  which  are  noted  later,  the  ore  pool  was  threatened  with 


THE   WIRE-NAIL   ASSOCIATION    OF    1895-96  JJ 

disruption,  and  in  the  spring  of  1897  it  seemed  alirj^t  certain 
that  no  agreement  would  be  made  for  the  coming  season's 
business.  An  arrangement  was  nevertheless  entered  into  by 
some  of  the  leading  producers,  but  on  a  very  much  lower  basis 
as  to  price.  Thus,  whereas  the  standard  price  for  Gogebic 
ores  in  1896  had  been  ^4  a  ton,  the  basis  in  the  1897  agreement 
was  about  $2.^^. 


IV 
THE   ADDYSTON    PIPE   COMPANY i 

THE  relevant  facts  may  be  classified  under  the  following 
headings  :  first,  the  terms  of  the  trust  agreement ;  second, 
its  purposes ;  third,  its  practical  construction  and  operation ; 
fourth,  its  effects  upon  the  public. 

I.    Terms  of  the  Agreement 
The  six  companies  are  located  as  follows : 

Addyston  Co. Cincinnati,  Ohio 

Dennis  Long  &  Co Louisville,  Ky. 

South  Pittsburg  Co South  Pittsburg,  Tenn. 

Chattanooga  Co Chattanooga,  Tenn. 

Anniston  Co. Anniston,  Ala. 

Howard  Harrison  Co.    .....  Bessemer,  Ala. 

It  is  to  be  borne  in  mind  in  understanding  this  agreement  that 
the  greater  part  of  the  business  consists  in  taking  contracts  for 
municipal  corporations,  gas  or  water  companies,  and  other  large 
institutions  which  usually  invite  bids  from  various  competitors. 

The  earlier  agreement  of  December  28,  1894,  is  of  present 
importance  only  in  so  far  as  its  provisions  have  been  continued 
in  effect,  namely,  in  respect  to  the  "  reserved  cities  "  and  to  the 
extent  of  the  "  pay  territory."  The  main  agreement  was  pro- 
posed by  John  W.  Harrison,  President  of  the  Howard  Harrison 
Co.,  on  May  16,  1895,  and  adopted  on  May  27,  1895,  in  the 
form  of  a  resolution  entered  upon  the  minutes  of  the  association. 
It  is  as  follows  (page  83): 

1  From  argument  of  Hon.  E.  B.  Whitney,  U.  S.  Assistant  Attorney-General,  in 
U.  S.  V.  Addyston  Pipe  and  Steel  Co.,  U.  S.  Circuit  Court  of  Appeals,  Sixth  Circuit. 
Appeal  Case  No.  498.  Page  references  run  to  the  testimony  in  the  official  court 
record.     The  opinion  in  the  above  case  is  reprinted  in  part  in  Chapter  XVI,  ijifra. 

78 


THE   ADDYSTON    PIPE   COMPANY  79 

That  from  and  after  the  first  day  of  June  that  all  competition  on  the 
pipe  lettings  shall  take  place  among  the  various  pipe  shops  prior  to  the 
said  letting.  To  accomplish  this  purpose  it  is  proposed  that  the  six 
competitive  shops  have  a  "representative  board"  located  at  some 
central  city  to  whom  all  inquiries  for  pipe  shall  be  referred,  and  said 
board  shall  fix  the  price  at  which  said  pipe  shall  be  sold,  and  bids  taken 
from  the  respective  shops  for  the  privilege  of  handling  the  order,  and 
the  party  securing  the  order  shall  have  the  protection  of  all  the  other 
shops,  .  .  .  All  division  of  bonuses  to  remain  as  now  established 
during  the  year  1895. 

This  system  of  bidding  is  known  as  "  buying  a  job  "  (page  89). 

One  exception  to  the  general  rule  is  that  of  the  "  reserved 
cities  "  which  remain  tacitly  under  the  resolution  of  December 
28,  1894,  as  follows  (pages  77-7^): 

Third.  The  Addyston  Pipe  and  Steel  Company  shall  handle  the 
business  of  the  Gas  and  Water  companies  of  Cincinnati,  Ohio,  Covington 
and  Newport,  Ky.,  and  pay  the  bonus  hereafter  mentioned,  and  the 
balance  of  the  parties  to  this  agreement  shall  bid  on  such  work  such 
reasonable  prices  as  they  shall  dictate. 

Fourth.  Dennis  Long  and  Company  of  Louisville,  Ky.,  shall  handle 
Louisville,  Ky.,  Jeffersonville,  Ind.,  and  New  Albany,  Ind.,  furnishing  all 
the  pipe  for  Gas  and  Water  works  in  above  named  cities. 

Fifth.  The  Anniston  Pipe  and  Foundry  Company  shall  handle  An- 
niston,  Ala.,  and  Atlanta,  Ga.,  furnishing  all  pipe  for  Gas  and  Water  com- 
panies in  above  named  cities. 

Sixth.  The  Chattanooga  Foundry  and  Pipe  Works  shall  handle 
Chattanooga,  Tenn.,  and  New  Orleans,  La.,  furnishing  all  gas  and  water 
pipe  in  the  above  named  cities. 

Seventh.  The  Howard  Harrison  Iron  Company  shall  handle  Bes- 
semer and  Birmingham,  Ala.,  and  St.  Louis,  Mo.,  furnishing  all  pipe  for 
Gas  and  Water  companies  in  the  above  named  cities ;  extra  bonus  to  be 
put  on  East  St,  Louis  and  Madison,  111.,  so  as  to  protect  the  prices 
named  for  St.  Louis,  Mo. 

Eighth.  South  Pittsburg  Pipe  Works  shall  handle  Omaha,  Neb.,  on 
all  sizes  required  by  that  city  during  the  year  of  1895,  conferring  with 
the  other  companies  and  cooperating  with  them ;  thereafter  they  shall 
handle  the  Gas  and  Water  companies  of  Omaha,  Neb.,  on  such  sizes  as 
they  make. 

Note.  —  It  is  understood  that  all  the  shops  who  are  members  of  this  association 
shall  handle  the  business  of  the  gas  and  water  companies  of  the  cities  set  apart  fot 
them  including  all  sizes  of  pipe  made  by  them. 


8o  TRUSTS,    POOLS   AND    CORPORATIONS 

A  modification  was  made,  however,  on  December  19,  1895,  as 
follows  (page  84) : 

That  upon  all  inquiries  from  prices  from  "  reserved  cities  "  for  pipe  re- 
quired during  the  year  of  1S96,  that  prices  and  bonus  shall  be  fixed  at 
a  regular  or  called  meeting  of  the  principals. 

Another  exception  recognized  was  that  of  "  special  cus- 
tomers "  of  the  different  concerns.  As  to  these  it  was  resolved 
on  May  27,  1895  (page  84): 

That  when  an  inquiry  is  reported  to  which  a  member  can  properly 
establish  a  claim  as  a  special  customer,  such  inquiry  should  not  be  dis- 
posed of  by  the  "  auction  basis,"  but  shall  be  handled  by  such  member, 
the  committee  fixing  the  price  and  bonus,  such  price  and  bonus  to  be 
commensurate  with  prices  and  bonuses  at  the  time  such  inquiry  shall  be 
reported. 

It  was  further  resolved  on  the  same  day  (page  84): 

That  all  parties  to  this  association  having  quotations  out  shall  notify 
their  customers  that  the  same  will  be  withdrawn  by  June  i,  1S95,  if  not 
previously  accepted,  and  upon  all  business  accepted  on  or  after  June 
I  St,  bonuses  shall  be  fixed  by  the  committee. 

The  provisions  of  this  agreement  operated  only  in  what  was 
called  the  "pay  territory  "  or  "bonus  territory."  This  territory 
is  described  in  the  pleadings,  the  opinion  of  Judge  Clark,  and 
the  resolution  at  page  y8  of  the  record.  It  includes  the  whole  of 
the  United  States  except  Virginia  and  the  States  north  and  east 
thereof,  and  except  the  Territory  of  Alaska. 

The  bonuses,  when  not  fixed  on  the  "auction  basis,"  are  fixed 
by  a  schedule  shown  on  page  78,  by  such  modifications  as  have 
since  been  made  therein,  or  by  special  order  of  the  committee. 

To  carry  out  the  objects  of  the  association,  headquarters  were 
established  at  Cincinnati,  Ohio,  with  an  office  force  and  a  com- 
mittee of  representatives  from  the  various  shops  (pages  83-84). 
The  bonuses,  after  December  20,  1895,  were  divided  according 
to  a  schedule  based  on  the  following  estimated  tonnage  of  the 
various  shops  (page  86) : 


THE   ADDYSTON    PIPE    COMPANY  8 1 

South  Pittsburg         .         .         .         .         .         .         .         .  .  15,000 

Anniston  ..........  30,000 

Chattanooga     ....,....,  40,000 

Bessemer  ..........  45,000 

Louisville  ..........  45,000 

Cincinnati         ..........  45,000 

The  bonuses  were  not  paid  upon  the  acceptance  of  the  bid 
or  even  upon  the  successful  closing  of  the  contract  with  the 
purchaser,  but  only  upon  the  actual  shipment  of  the  pipe. 
Thus  the  schedule  last  quoted  reads  as  follows  (page  86) : 

ist.  On  the  first  90,000  tons  of  pipe  shipped  into  "  pay  territory  "  16" 
and  smaller  sizes  shall  be  divided  among  the  six  shops  [etc.]. 

In  order  to  insure  the  proper  working  of  the  combination,  an 
auditor's  office  was  established  and  regular  reports  required. 
Thus  (pages  80-82): 

Third,  Sec.  ist.  Each  shop  shall  report  daily  to  the  auditor  all 
orders  secured  in  bonus  or  free  territory,  giving  the  shop  number  [etc.]. 

Sec.  2d.  On  the  ist  and  i6th  of  each  month  they  shall  report  to  the 
auditor  all  shipments  made  in  all  territory,  giving  shop  number  [etc.]  ; 
showing  the  amount  of  bonus  and  tonnage,  of  the  bonus  as  well  as  free 
territory. 

Sec.  4th.  The  auditor  shall  make  carbon  copies  daily  of  all  reports 
received,  and  send  one  to  each  shop,  and  to  such  others  as  may  be 
designated. 

******** 

Sec.  3d.  He  shall  on  the  ist  and  i6th  of  each  month,  or  as  soon  as 
practicable,  send  to  each  shop  a  statement  of  all  shipments  reported  in 
the  previous  half  months,  with  a  balance  sheet  showing  the  total  amount 
of  the  premiums  on  shipments,  the  division  of  the  same,  and  a  debit 
credit  balance  of  each  company ;  also  a  statement  of  free  orders  se- 
cured during  the  same  period ;  and  a  memorandum  of  balance  payable 
from  one  to  another. 

**»*«*** 

Whoever  has  a  representative  at  any  public  letting  shall  instruct  him 
to  send  to  the  auditor  a  full  list  of  the  bids  and  bidders  on  same ;  also 
that  all  information  in  regard  to  work  taken  in  pay  territory  by  the  shops 
outside  of  this  association  shall  be  reported  to  the  auditor,  who  shall 


82  TRUSTS,    POOLS   AND    CORPORATIONS 

keep  a  proper  record  of  such  information  and  send  carbon  copies  of 
same  to  all  of  the  members  of  this  association. 

******** 
That  whenever  an  order  is  reported  by  any  shop,  and  a  doubt  exists 
as  to  the  proper  bonus  to  be  paid,  that  it  be  reported  with  the  facts  in 
the  case,  to  be  acted  upon  at  the  next  meeting  of  the  executive  com- 
mittee. 

The  combination  also  kept  a  "  black  list  "  for  some  boycotting 
purpose  not  explained  (page  90). 


2.    Purposes  of  the  Agreement 

The  agreement  of  May  27,  1895,  contains  the  following  recital 
of  its  purpose  (pages  82-83): 

Whereas,  the  system  now  in  operation  in  this  association  of  having  a 
"  fixed  bonus  on  the  several  States  "  has  not  in  its  operation  resulted  in 
the  advancement  in  the  prices  of  pipe  as  was  anticipated,  except  in  "  re- 
served cities'''  and  some  further  action  is  imperatively  necessary  in  order 
to  accompHsh  the  ends  for  which  this  association  was  formed :  There- 
fore [etc.] 

Mr.  Bowron  of  the  South  Pittsburg  company  says  that  the 
association  was  established  "to  maintain  fair  prices  and  a  just 
distribution  of  work  "  —  "  to  maintain  fair  prices  and  secure  for 
each  a  fair  proportion  of  the  work  in  a  certain  territory,  by 
restraining  in  a  certain  measure  competition  as  among  them- 
selves only"  —  "to  restrain  competition  as  among  defendants 
and  allow  to  each  a  profitable  division  of  work  according  to  its 
relative  capacity,  and  thereby  maintain  fair  prices  to  all  "(pages 
194-195). 

Mr.  C.  W.  Harrison  of  the  same  company  says  that  it  was 
"  on  the  theory  that  destructive  competition  results  in  monopoly," 
and  that  it  "  was  the  purpose  of  this  association  to  maintain  fair 
prices  and  secure  for  each  of  its  members  a  fair  proportion  of 
the  work  in  a  certain  territory  by  restraining  in  a  reasonable 
measure  competition  as  among  themselves  only"  (page  216). 

Mr.  Callahan  of  the  Louisville  company  says  that  it  was  "to 
maintain  fair  prices,   to  regulate  credits,  and  to  accomplish  an 


THE   ADDYSTON    PIPE    COMPANY  83 

equitable  distribution  of  such  orders  as  the  six  defenda«te  could 
secure  in  competition  with  the  other  manufacturers  of  cast  iron 
pipe"  —  "by  regulating  to  a  certain  extent  the  competition 
among  the  defendants  only,  to  endeavor  to  maintain  fair  prices, 
and  to  secure  to  each  of  the  defendants  a  fair  proportion  of  the 
orders  in  a  certain  territory  "  (pages  263-264). 

In  describing  the  auction  system,  Mr.  Callahan  clearly  states 
what  "fair  prices"  mean  as  understood  by  such  combinations: 
"These  voluntary  offers  from  defendants  were  each  based  upon 
such  prices  for  the  respective  orders  as  these  defendants  con- 
sidered would  be  fair  and  reasonable  prices  "  (page  264). 

That  fairness  and  reasonableness  from  the  consumers'  point 
of  view  was  not  at  all  taken  into  consideration  is  shown  by  the 
prices  actually  charged  in  "  pay  territory  "  as  set  forth  in  the 
record,  and  by  a  letter  of  Mr.  Thomasson  of  the  Chattanooga 
company  (pages  102-103): 

We  believe  that  as  a  general  thing  we  have  had  our  prices  entirely  too 
high,  and  especially  do  we  believe  this  has  been  the  case  as  to  prices  in 
"  reserved  cities."  The  prices  made  at  St.  Louis  and  Atlanta  are  entirely 
out  of  all  reason,  and  the  result  has  been  and  always  will  be,  when  high 
prices  are  named,  to  create  a  bad  feeling  and  an  agitation  against  the 
"Combination."  There  is  no  reason  why  Atlanta,  New  Orleans,  St. 
Louis,  or  Omaha  should  be  made  to  pay  higher  prices  for  their  pipe 
than  any  other  places  near  them  who  do  not  use  anything  like  the 
amount  of  pipe  and  whose  trade  is  not  as  desirable  for  many  other 
reasons. 

The  affidavits  of  defendants  show  how  in  some  respects  this 
combination  works  beneficially  by  distributing  orders  in  such  a 
manner  that  a  greater  regularity  of  employment  is  obtained  at 
the  different  shops.  This  is  immaterial.  Probably  few  unlawful 
combinations  would  fail  to  secure  economy  of  service  to  some 
considerable  extent.  The  element  of  evil  does  not  fail  to  vitiate 
the  agreement  because  it  contains  likewise  an  element  of  good. 
A  most  interesting  letter  of  Mr.  Thomasson  (pages  110-112) 
shows  that  the  bonus  system  was  not  intended  to  work,  and  did 
not  actually  work,  simply  as  a  distributor  of  employment,  leaving 
the  price  charged  to  the  consumer  merely  the  actual  cost  with  a 
fair  business  profit.     While  some  proportion  of  the  bonus  may 


84  TRUSTS,   POOLS  AND   CORPORATIONS 

represent  economy  in  production,  a  part  of  it  is  shown  to  repre- 
sent  an  extra  profit  divided  up  among  the  different  companies. 
Mr.  Thomasson  points  out  how  the  Bessemer  company  is  going 
too  far  in  speculating  on  this  extra  profit,  and  how  his  own  com- 
pany is  secretly  taking  advantage  of  this  error  of  its  associate 
(page  III): 

If  they  should  continue  to  buy  all  the  pipe  that  goes  up  to  such  figures 
as  they  have  paid  for  Jacksonville  and  other  points,  they  would  wreck 
their  shop  in  a  few  months.  However,  they  of  course  calculate  this 
bonus  will  he  returned  to  them  on  work  taken  by  other  shops.  We  are 
very  much  pleased  with  the  bonus  that  has  been  paid,  and  we  only  hope 
they  will  keep  it  up  as  it  is  only  money  in  our  pockets.  .  .  .  We 
note  Mr.  Thornton's  report  of  average  premiums  from  June  i  to  Decem- 
ber that  the  average  was  $3.63.  The  average  bonuses  that  are  prevail- 
ing to-day  are  $7  to  ^8.  We  cannot  expect  this  to  continue.  ...  If 
we  cannot  secure  business  in  "  pay  territory  "  at  paying  prices,  we  think 
we  will  be  able  to  dispose  of  our  output  in  "  free  territory,"  and  of  course 
make  some  profit  on  that.  At  the  prices  that  Howard  Harrison  people 
paid  for  Jacksonville,  Des  Plaines,  and  one  or  two  other  points,  they  are 
losing  from  $2.50  to  $3  per  ton,  that  is,  provided  "bonuses"  would  not 
be  returned  to  them.  Therefore  when  business  goes  at  a  loss  we  are 
willing  that  the  other  shops  make  it.  .  .  . 

p.S.  —  Do  not  leave  this  letter  on  your  desk,  where  it  might  fall  into 
the  hands  of  others.  Make  a  memorandum  and  tear  the  letter  up. 
Above  all  things  make  a  confidant  of  no  one  in  business  matters. 

I  shall  comment  again  later  on  this  letter. 

3.   Practical  Construction  and  Operation 

The  record  gives  some  interesting  information  about  the 
working  of  this  agreement  in  different  cities, 

Chicago. — At  a  meeting  of  the  associates  on  February  14, 
1896,  it  was  decided  that  an  order  of  the  Chicago  Gas  Company 
should  be  filled  at  $22  and  $21.50  with  a  bonus  of  $5  (page  88), 
and  (apparently  on  some  other  Chicago  advertisement,  page  89): 

On  motion  of  A.  F.  Callahan,  it  was  agreed  on  the  dates  of  the 
Chicago  letting  at  least  five  of  the  shops  should  be  represented  and  a 
majority  of  them  should  decide  what  bid  should  be  made.  The  job  to 
be  regularly  disposed  of  by  the  committee  before  the  letting. 


THE   ADDYSTON    PIPE   COMPANY  85 

The  presence  of  five  shops  at  the  letting  was  in  pursuance  of 
the  system  of  "protecting  bids,"  by  shghtly  higher  false  bids  on 
the  part  of  the  companies  which  had  agreed  with  the  combina- 
tion not  genuinely  to  compete  for  the  order.  This  system  has 
been  consistently  maintained  by  the  associates.  Its  advantages 
for  purposes  of  concealment  are  obvious. 

Louisville.  —  The  record  of  December  28,  1895,  contains  the 
following  (page  85): 

F.  B.  Nichols  moved  that  Dennis  Long  &  Company  be  aUotued  to 
close  contract  for  the  year  of  1896,  with  the  Louisville  Water  Company 
at  the  best  price  they  can  obtain  for  same,  and  after  securing  contract 
refer  the  same  to  the  meeting  of  the  principals  to  fix  bonus. 

Seconded  by  A.  F.  Callahan.     Carried. 

St.  Lo7iis.  —  Mr.  Nichols  of  the  Bessemer  company  writes  to 
the  other  companies  on  January  24,'i896,  as  follows  (page  94): 

I  prefer  that  if  any  of  you  find  it  necessary  to  put  in  a  bid  without 
going  to  St.  Louis,  please  bid  not  less  than  ^27.00  for  the  pipe,  and 
2f  cents  per  pound  for  the  specials.  I  would  also  like  to  know  as  to 
which  of  you  would  find  it  convenient  to  have  a  representative  at  the 
letting.     It  will  be  necessary  to  have  two  outside  bidders. 

St.  Louis  was  a  "  reserved  city  "  belonging  to  the  Bessemer 
company  (page  JJ),  and  paying  a  bonus  of  $2  per  ton  (page  78). 
The  amount  shipped  from  April  i,  to  December  31,  1895,  was 
10,970  tons,  giving  a  bonus  of  about  ^22,000  to  the  combination 
(pages  94-95). 

Kiioxvillc. — The  Knoxville  Woollen  mills  on  April  25,  1896, 
wrote  to  Chattanooga  and  Bessemer  for  quotations  of  cast  iron 
pipe  (page  62).  This  contract  seems  to  have  been  bid  in  by 
Chattanooga,  which  telegraphed  the  other  companies  on  April 
29 :  "  We  will  advance  price  Knoxville  Woollen  mills  dollar  and 
half  ;  please  protect "  (page  96),  at  the  same  time  bidding  $22  per 
ton  (page  63).  Bessemer  accordingly,  through  Mr.  Nichols,  bid 
1^22.24  per  ton  on  April  30,  with  the  hypocritical  comment, 
"  Trusting  that  we  will  be  favored  with  your  order,  we  are  yours 
truly"  (pages  63-64). 

Omaha.  —  The  working  of  the  agreement  is  well  shown  by  the 
bidding  for  Omaha  on  December  20,  1895  (page  ?>'j)'. 


86  TRUSTS,    POOLS   AND    CORPORATIONS 

W.  L.  Davis  moved  to  sell  the  519  pieces  of  20"  pipe  for  Omaha, 
Neb.,  for  $23.40  delivered. 

Seconded  by  D.  R.  P.  Dimmick.     Carried. 

F.  B.  Nichols  moved  that  Anniston  participate  in  this  bonus  and  the 
job  be  sold  over  the  table. 

Seconded  by  W.  L.  Davis.     Carried. 

Pursuant  to  the  motion  the  519  pieces  of  20"  pipe  for  Omaha  was 
sold  to  Bessemer  at  a  premium  of  $8. 

The  water  companies  of  Omaha  belong  to  South  Pittsburg 
(page  yy).  The  receiver  of  one  of  them  called  for  bids  in  April, 
1896,  under  competitive  circumstances  which  the  company's 
agent  evidently  thought  "  will  make  him  some  trouble,  especially 
if  we  try  to  obtain  too  high  a. price"  (pages  1 20-121).  In  re- 
sponse to  a  call  upon  Chattanooga  for  "  protection  "  Mr.  Thomas- 
son  wrote  as  follows  on  April  28  (page  121): 

Please  advise  us  at  once  as  to  what  figure  we  shall  make  on  this  work. 
Please  do  not  ask  us  to  make  a  price  of  two  or  three  dollars  per  ton 
higher  than  yours,  but  give  us  a  reasonable  price  to  name. 

The  Pittsburg  company  responded  (page  122): 

We  request  that  you  please  quote  the  American  Water  Works  Com- 
pany of  Omaha  price  of  $24.80  per  ton  of  2000  pounds  f.  o.  b.  Omaha. 

Accordingly  Chattanooga  wrote  the  following  candid  letter  to 
the  Receiver  at  Omaha  (page  122): 

Dear  Sir  :  Replying  to  your  favor  of  the  25th  instant,  we  propose  to 
furnish  cast  iron  pipe  as  per  specifications  for  $24.80  per  ton  two  thou- 
sand pounds,  and  will  furnish  special  castings  from  our  regular  patterns 
for  two  and  one-fourth  cents  per  pound,  all  delivered  on  board  cars 
Omaha,  Neb.  We  are  in  a  position  to  give  you  prompt  shipment  on 
this  pipe  and  trust  this  time  we  will  be  favoird  tvith  your  order. 

Very  truly,  yours, 

Chatta.  Fdy.  &  Pipe  Works, 
By  E.  B.  Thomasson 

Such  letters  may  afford  the  court  some  hint  as  to  the  amount 
of  weight  which  can  be  placed  upon  the  testimony  of  the  gentle- 
men who  manage  this  honest  combination. 

Atlanta.  —  This  city  was  the  property  of  the  Anniston  com- 
pany (page  yy),  which  paid  a  bonus  of  $2  per  ton  as  the  rent  of  the 


I 


THE   ADDYSTON    PIPE   COMPANY  87 

property  (page  y8),  until  it  was  provided  that  such  bomises  should 
be  fixed  at  a  meeting  of  the  principals  (page  84).  On  February  1 5,  - 
1896,  the  Chattanooga  company  had  an  inquiry  from  the  Atlanta 
Water  Works  for  1500  feet  of  12"  pipe,  and  about  12,000  feet 
of  pipe  varying  from  6"  to  10"  with  a  lot  of  special  castings. 
The  company,  through  Mr.  Thomasson,  at  once  asked  Anniston 
"As  to  what  price  you  desire  us  to  protect  on  this  contract" 
(page  97).     Anniston  answered  through  Mr.  Dimmick  (page  97) : 

Please  protect  $24  on  approximately  375  tons  of  cast-iron  pipe  for  the 
city  of  Atlanta,  Ga.,  on  which  we  are  asked  to-day  for  prices.  We  have 
sent  a  man  over  to  Atlanta  and  will  get  as  much  more  as  possible. 

This  price  was  nearly  $10  per  ton  (less  cost  of  transportation) 
over  what  would  be  a  paying  profit  at  Chattanooga  (page  in). 
Chattanooga,  however,  bid  $24.50  per  ton  delivered  on  board 
cars  at  Atlanta,  ad,ding  with  its  usual  ingenuousness :  "  We  can 
give  you  a  prompt  delivery  on  above  pipe  and  would  be  pleased 
to  receive  your  order  "  (page  98).  A  lower  bid  had  been  received 
from  R.  D.  Wood  &  Co.,  of  Philadelphia,  but  all  bids  were 
rejected  by  the  Atlanta  people,  as  they  "were  extremely  high" 
(page  98).  The  bids  thus  rejected  give  a  good  example  of  the 
method  by  which  these  companies  "protected"  each  other,  and 
incidentally  led  the  consumer  to  suppose  the  prices  reasonable. 
They  were:  Anniston,  $24;  Bessemer,  $24.25  ;  South  Pittsburg, 
$24.25  ;  Chattanooga,  $24.50  (page  53). 

Anniston  at  once  telegraphed  Chattanooga :  "  Stand  pat  on 
your  price  "  (page  99),  and  in  response  to  complaints  about  the 
high  price  replied  :  "  We  believe  we  made  a  mistake  in  trying  to 
get  $24  for  pipe  and  2.]  cents  for  specials,  but  there  would  have 
been  no  difficulty  in  this  respect  had  we  not  run  up  against 
R.  D.  Wood  &  Co.'s  man  there  putting  in  his  bid  for  hydrants, 
and  he  also  put  in  a  bid  for  the  pipe  and  specials  at  the  last 
moment;"  that  "they  [the  Atlanta  authorities]  stated  it  was 
their  belief  that  the  four  southern  shops  have  an  arrangement  by 
which  Anniston  is  to  get  the  work ;  in  other  words,  that  we  had 
a  combination  between  us,  and  if  they  can  find  it  out  positively, 
they  will  never  receive  a  bid  from  any  of  us  again  ;  "  and  recom- 
mended that  all  four  southern  shops  have  representatives  on  the 


88  TRUSTS,   POOLS   AND   CORPORATIONS 

ground  at  the  next  letting  on  March  4  (pages  99-100).  The  Annis- 
ton  company's  report  from  its  agent  at  Atlanta  is  given  in  full  at 
pages  loo-ioi.  Besides  the  Philadelphia  man  he  met  Mr.  Torbett, 
Secretary  of  the  Water  board,  Mr.  Erwin,  one  of  the  Water 
Commissioners,  and  Colonel  Woodward,  Superintendent  of  the 
Water  Works.  He  told  the  city  council  that  "the  ruling  market 
price"  would  be  about  $24,  and  got  a  favorable  resolution 
through  the  council  without  a  dissenting  vote.  The  Philadelphia 
man,  however,  at  the  last  moment  put  in  a  bid  of  $23.  The 
threat  against  the  four  southern  shops  came  from  Mr.  Erwin, 
and  Colonel  Woodward  also  advised  the  rejection  of  all  bids.  The 
colonel's  advice  may  have  been  on  the  ground  that  "  he  promised 
me  when  there  last  he  would  give  us  another  chance  in  the  event 
we  were  not  the  lowest  bidders."  In  other  words,  he  knew  that 
the  Anniston  company  could  afford  to  furnish  the  pipe  at  a  lower 
price  than  what  they  were  passing  off  as  the  "  ruling  market 
price."  It  is  not  surprising  that  the  colonel  appears  as  an 
affiant  on  behalf  of  the  Anniston  company,  maintaining  that  its 
prices  were  "fair,  reasonable,  and  moderate"  (pages  200-202), 
though  perhaps  it  may  be  surprising  that  Mr.  Erwin  fell  in  line 
with  him  (page  202). 

Negotiations  were  opened  with  the  Philadelphia  concern  to  pre- 
vent its  appearance  at  the  second  bidding  (page  103).  On  April 
10  (page  59)  the  contract  was  made  with  the  Anniston  company  at 
$22.75  for  the  year's  supply,  and  $22  for  some  "  special  ship- 
ments." Assuming  the  cost  with  a  fair  profit  at  Anniston  to  be 
substantially  the  same  as  at  Chattanooga,  and  assuming  the  freight 
from  Anniston  to  Atlanta  to  be  $1.60  per  ton  (page  90),  this  made 
a  price  of  about  $6.75  per  ton  over  and  above  a  fair  and  reason- 
able profit.  This  seems  to  be  an  underestimate,  because  we 
find  the  following  entry  in  the  minutes  of  the  Associated  Pipe 
Works  for  March  13,  1896  (page  90): 

Moved  that  "  bonus  "  on  Anniston's  Atlanta  Water  Works  contract  be 
fixed  at  $7.10,  provided  freight  is  $1.60  a  ton.     Carried. 

Before  payment  was  made  by  the  Atlanta  Water  Works,  an 
investigation  was  had,  based  upon  charges  by  the  same  man 
whose  information  led  to  the  present  suit.     The  charges  were 


THE   ADDYSTON    PIPE   COMPANY  89 

referred  to  a  special  committee,  consisting  of  Messrs.J^rwin  and 
Torbett  and  one  Hass,  on  May  18,  1896  (page  203).  The  city's^ 
attorneys  had  advised  that  the  city  could  recover  in  a  suit  against 
the  Anniston  Works  (pages  207-2 10).  The  committee,  however, 
unanimously  overruled  the  attorneys  after  hearing  the  officers  of 
the  Anniston  company  (pages  203-210). 

4.   The  Effects  upon  the  Public 

It  is  not  essential  to  show  deleterious  effects  upon  the  public, 
but  the  subject  is  an  interesting  one,  and  the  gleams  of  hght 
from  this  record  are  also  interesting. 

The  defendants  have  repeated  ad  nauseam  affidavits  tend- 
ing to  show  that  there  were  other  large  works  —  larger  perhaps 
than  their  own  —  in  the  United  States.  A  tonnage  statement, 
for  instance,  is  given  (by  an  interested  witness  and  annexed  to 
an  evasive  affidavit)  of  factories  through  the  country,  including 
some  very  large  ones  in  Pennsylvania  and  New  Jersey  (page  270). 

It  also  appears,  however,  that  the  rates  of  freight  are  very 
high.  For  instance,  pipe  which  is  worth  from  $13  to  $iA-7S  at 
the  shop  in  Chattanooga  (page  in)  pays  $6  to  Peabody,  Mass., 
and  $5.55  to  Lockhaven,  Pa.  (page  104);  $5.60  to  Clifton,  N.  Y. 
(page  105),  $4.80  to  Wytheville,  Va.,  $5.40  to  Troy,  N.  Y.,  $3.90 
to  Allegheny,  Pa.,  and  $4.95  to  Syracuse,  N.  Y.  (page  106).  The 
effect  of  these  high  rates,  together  with  the  location  of  these 
factories  on  or  near  the  west  slope  of  the  Appalachian  moun- 
tain range,  gives  to  them  (and  to  the  few  other  western  works) 
a  practical  monopoly  of  nearly  all  the  "  pay  territory  "—in  other 
words,  of  everything  but  the  Northern  and  the  Middle  states. 
To  this  general  statement  there  must  be,  of  course,  an  exception 
as  to  localities  on  the  coast  line  and  elsewhere  within  the  "  pay 
territory"  that  are  within  the  reach  of  northeastern  factories. 
The  small  importance  of  these  exceptions,  however,  may  be 
gathered  from  the  affidavits  submitted  by  defendants  themselves. 
They  have  undertaken  to  show  the  actual  origin  of  the  pipe  used 
in  large  portions  of  the  "  pay  territory,"  and  have  only  succeeded 
in  identifying  the  great  Pennsylvania  and  New  Jersey  factories 
with  two  small  lots  of  unspecified  amount  (pages  213,271).    They 


90  TRUSTS,   POOLS  AND   CORPORATIONS 

content  themselves  with  such  evasive  statements  as  those  of  Mr. 
Callahan  at  page  265  of  the  record,  specifying  neither  the  size  of 
the  orders  nor  the  portions  of  the  "pay  territory"  where  they 
are  found. 

It  is  clear  that  as  to  the  bulk  of  the  "  pay  territory  "  —  that  is, 
as  to  the  bulk  of  the  United  States  —  their  competition  comes 
from  but  few  rivals.  In  main  it  seems  to  be  confined  to  the 
works  at  Cleveland,  Columbus,  and  Newcomerstown,  Ohio,  and 
Detroit,  Mich.,  whose  capacity  is  200,  100,  75,  and  75  tons  per 
day,  respectively  (pages  197,  250,  181,  188).  A  concern  is  indeed 
mentioned  as  competing  at  St.  Louis,  but  it  is  suspected  to  be 
identical  with  the  Bessemer  concern  (pages  61-62),  with  which  it  is 
almost  identical  in  name.  The  factories  in  Colorado  and  Oregon 
are  small  and  seem  to  cut  only  a  local  figure.  The  same  may  be 
said  of  the  Texas  penitentiary. 

Such  information  as  is  given  us  leads  to  the  conclusion  that 
the  Ohio  and  Michigan  concerns  have  the  smaller  end  of  the 
business,  even  in  territory  for  which  transportation  rates  permit 
them  to  compete.  Mr.  Hallett,  a  general  contractor  in  Aurora, 
111.,  gives  the  precise  figures  for  his  purchases  in  1895  and  1896. 
He  purchased  514  tons  from  the  combination,  25  tons  from  the 
Newcomerstown  concern  (J.  B.  Clow  &  Son),  and  50  tons  from 
jobbers  (pages  123-124).  Mr.  W.  H.  Garrett,  of  Batavia,  III, 
gives  the  purchases  of  the  Water  Works  Department  of  Fair- 
banks, Morse  &  Co.  for  the  same  period.  They  included  1023 
tons  from  the  combination,  690  tons  from  Columbus,  79  tons 
from  Cleveland,  and  35  tons  from  the  Glamorgan  Pipe  and 
Foundry  Co.  of  Lynchburg,  Va.  These  purchases  were  "in  the 
business  of  contracting  water  works  for  municipalities  throughout 
the  United  States'"  (pages  129-130). 

We  could  judge  more  accurately  of  the  strength  of  the  Asso- 
ciated Pipe  Works  if  we  were  definitely  informed  as  to  their 
capacity /^r  (^zV;«.  They  have  been  so  careful  to  produce  testi- 
mony as  to  the.  per  diem  capacity  of  other  companies  (pages  178- 
179,  180-181,  187-189,  196-198,  198-200,  249-250)  that  we  may 
infer  that  there  was  good  reason  for  their  failing  to  be  specific  as  to 
their  own.  The  only  specific  testimony  bearing  on  the  point  is  that 
of  Mr.  Llewellyn  as  to  his  Chattanooga  company.     He  gives  its 


THE   ADDYSTON    PIPE   COMPANY  91 

capacity  at  "  about  40,000  tons  of  cast  iron  pipe  ancLspecial  cast- 
ings annually  "(page  243).  This  figure,  however,  is  evidently  taken, 
from  the  minutes  of  the  combination  at  page  86,  which  is  shown 
by  Mr.  Thomasson  of  his  own  company  not  to  represent  the  actual 
capacity  of  the  various  works,  but  their  usual  output  (page  in). 
The  40,000  tons  ascribed  to  Chattanooga  represent  its  proportion 
of  the  220,000  which  are  assumed,  not  as  the  full  capacity  of  the 
works,  but  as  their  probable  annual  shipments  into  pay  territory. 
The  total  of  these  shipments  is  estimated  at  220,000  for  the  six 
companies,  but  Mr.  Thomasson  says  : 

We  think  a  very  conservative  estimate  of  shipments  into  this  territory 
will  amount  to  fully  200,000  this  year  ;  more  than  that  —  probably  over- 
run 240,000  tons. 

The  same  estimate  which  gives  Chattanooga  40,000  gives 
South  Pittsburg  and  Anniston  45,000  combined  (page  86);  but 
the  officers  of  these  companies  join  with  Mr.  Llewellyn  himself 
in  verifying  the  answer  (pages  43-44 )»  which  contains  the  follow- 
ing statement  as  to  the  "pay  territory"  (page  36): 

They,  however,  deny  that  the  shipments  of  pipe  for  1896  amount  to 
more  than  100,000  tons  in  said  territory,  which  they  aver  could  have 
been  supplied  by  any  two  of  defendants  so  as  to  deprive  all  others  of  any 
share  thereof. 

In  ascertaining  the  actual  capacity  we  may  therefore  pretty 
safely  double  the  estimate  at  page  86,  and  assume  it  to  be  440,000 
tons  a  year,  or  nearly  1,500  tons  per  day,  as  against  the  450  tons 
per  day  of  their  four  principal  rivals. 

As  confirmatory  of  the  position  that  no  reliance  is  to  be  placed 
upon  the  statements  of  these  defendants  as  to  the  relative  work- 
ing capacity  of  the  different  shops  (except  when  their  statements 
are  not  made  for  use  in  the  present  suit),  we  may  compare  the 
answer  which  they  all  join  in  verifying  with  the  testimony  of 
their  own  witnesses  concerning  the  capacity  of  other  works. 
Thus,  the  answer  states  the  capacity  of  Scottdale  as  200  tons 
instead  of  100;  of  Columbus  as  150  tons  instead  of  100;  and  of 
Detroit  as  100  tons  instead  of  75  (pages  44,  179,  188,  250). 

Another  example  of  the  misleading  character  of  this  testimony 
is  in  the  statement  of  Mr.  Callahan  at  page  265  as  to  the  actual 


92  TRUSTS,    POOLS  AND   CORPORATIONS 

clearance  settlements  amounting  in  1895  to  only  38  cents  per 
ton,  when  compared  with  Mr.  Thomasson's  letter  of  January 
2,  1896,  showing  that  the  average  premiums  from  June  i  to 
December  31,  1895,  were  ^3.63  (page  in). 

Besides  the  partial  monopoly  which  they  were  enabled  to 
maintain  through  the  high  transportation  rates  and  the  limited 
output  of  their  western  rivals,  they  doubtless  resorted  to  special 
means  for  diverting  rivalry,  such  as  the  negotiation  for  the  with- 
drawal of  the  Philadelphia  company  from  competition  at  Atlanta 
(page  103),  and  the  plan  to  prevent  one  Drummond  "  from  invad- 
ing our  western  territory"  (page  113). 

Reasonableness  of  prices.  —  It  will  be  borne  in  mind  that,  even 
under  the  common  law  doctrine  permitting  reasonable  restraints 
of  trade,  the  burden  of  proof  as  to  reasonableness  is  on  the 
defendant. 

"  Wherever  such  contract  stat  indifferenter,  and,  for  aught 
appears,  may  be  either  good  or  bad,  the  law  presumes  it  prwia 
facie  to  be  bad"  (Lord  Macclesfield  in  Mitchel  v.  Reynolds, 
supra,  at  page  701).  "  In  all  restraints  of  trade,  where  nothing 
more  appears,  the  law  presumes  them  bad"  (id.,  at  page  704). 
"The  general  rule  is  that  all  restraints  of  trade  which  the  law  so 
much  favors,  if  nothing  more  appear,  are  bad"  (Willes,  C.  J., 
in  Master  of  Gunmakers  v.  Fell,  Willes,  388).  "  Contracts  in 
restraint  of  trade  are  in  themselves,  if  nothing  more  appears  to 
shew  them  reasonable,  bad  in  the  eye  of  the  law"  (Tindal,  C.  J., 
in  Horner  v.  Graves,  7  Bing.,  735,  744;  S.  P.  Patterson  on 
"  Contracts  in  Restraint  of  Trade,"  page  5  ;  Pierce  v.  Fuller,  8 
Mass.,  223  ;  'Clnippell  v.  Brockivay,  2iV\[&m\.,  157,  159;  Addison 
on  "Contracts,"  page  1154). 

We  have  in  this  record,  however,  affirmative  evidence  of  the 
unreasonableness  of  the  profits  obtained  by  these  corporations. 
Their  unreasonableness  is  shown  in  various  ways,  such  as  by  add- 
ing the  price  at  the  factory  (page  1 1 1 )  to  the  transportation  rate 
(page  90),  and  comparing  this  with  the  prices  actually  obtained, 
which  usually  range  from  about  $22  to  $25  per  ton.  It  is  also 
shown  by  the  actual  bonuses  paid  to  the  combination  for  the  privi- 
lege of  getting  a  contract,  these  bonuses  running  up  to  such  figures 


THE   ADDYSTON    PIPE   COMPANY  93 

as  ^7.10  (page  90),  $7.50  (page  88),  and  $8.00  ( page iL;^.)—  aver- 
aging from  $7.00  to  $8.00  in  January,  1896  (page  in).  It  is  also 
shown  by  the  large  amounts  of  the  aggregate  bonuses  which 
were  divided  up  among  these  companies  (pages  116-117).  It  is 
confirmed  by  the  statement  of  the  Chattanooga  company  itself 
that  the  prices  were  "entirely  too  high,"  especially  in  the  "re- 
served cities  "  ;  that  "  the  prices  made  at  St.  Louis  and  Atlanta 
are  entirely  out  of  all  reason  ; "  and  that  "  there  is  no  reason  why 
Atlanta,  New  Orleans,  St.  Louis,  or  Omaha  should  be  made  to 
pay  a  higher  price  for  their  pipe  than  other  places  near  them  " 
(page  103).  No  objection  was  made  to  this  statement  on  the 
score  of  competency ;  nor  can  its  competency  be  doubted  (  Wiboj-g 
V.  United  States,  163  U.  S.  at  pages  657-658). 

By  unduly  and  vastly  raising  the  normal  price  of  cast  iron 
pipe  among  communities  which,  by  their  geographical  position, 
should  have  enjoyed  special  advantages,  the  combination  has 
the  indirect  result  of  increasing  competition  in  the  northeastern 
or  "  free  territory."  This  is  shown  by  Thomasson's  letter  (pages 
I  lo-i  12),  stating  the  policy  of  the  Chattanooga  company  in  view 
of  the  high  bonusus  paid  by  the  Bessemer  company  for  southern 
contracts.  He  figures  out  an  advantage  to  the  Chattanooga 
company  in  refraining  from  bids  and  taking  its  share  of  the 
bonus  without  contributing  to  the  fund,  and  adds  : 

If  we  cannot  secure  business  in  "  pay  territory  "  at  paying  prices,  we 
think  we  will  be  able  to  dispose  of  our  output  in  "free  territory"  and 
of  course  make  some  profit  on  that. 

^13.00  to  $14.75  per  ton  is  stated  in  the  same  letter  to  be  a 
profitable  figure,  and  the  Chattanooga  company's  propositions  to 
northeastern  cities  after  this  letter  (pages  104-107)  show  how  the 
theory  is  carried  into  practice  by  giving  those  cities  an  advan- 
tage of  several  dollars  per  ton  in  price  over  the  naturally  better 
situated  cities  immediately  adjacent  to  the  works  of  these 
defendants.  Mr.  Llewellyn  of  Chattanooga,  the  chairman  of  the 
combination  and  one  of  its  principal  witnesses,  was  thus  secretly 
inimical  to  its  interests. 

The  letter  announcing  this  scheme  is  dated  January  2,  1896. 
We  are  furnished  with  the  balance  sheet  showing  payments  and 


94  TRUSTS,   POOLS  AND   CORPORATIONS 

divisions  of  bonus  for  the  ensuing  four  and  a  half  months 
(page  117).  We  find  that  Chattanooga  during  those  months  paid 
in  $2016.25,  and  drew  out  $i5.o77-99  — truly  a  vindication  of 
the  wisdom,  if  not  of  the  candidness,  of  this  valuable  witness. 

Cast  iron  pipe,  if  we  may  believe  Mr.  Harrison  of  South 
Pittsburg,  "  has  no  market  value  "  (page  214).  "  On  account  of 
the  manner  in  which  these  contracts  are  let,  the  customer  pre- 
vented the  establishment  of  any  market  price  "  (page  216).  We 
are  therefore  without  any  standard  of  reasonableness  derivable 
from  market  quotations.  The  evidence,  however,  is  overwhelm- 
ing that  in  large  portions  of  the  country  the  price  is  half  as 
much  again  what  it  ought  to  be. 

There  is,  indeed,  a  large  collection  of  ai^davits  stating  that 
these  prices  are  reasonable  in  the  opinion  of  the  affiants.  Some 
of  the  affidavits  are  by  interested  parties,  more  or  less  discredited 
as  above  shown.  Most  of  the  rest  are  by  persons  who  have  no 
real  expert  knowledge.  It  will  be  remembered  that  cast  iron 
pipe,  on  account  of  the  peculiarities  of  its  use,  and  on  account 
of  the  high  transportation  rates,  has  no  general  market  price 
throughout  the  country.  Each  local  witness  knows  only  that 
the  combination  gives  him  as  low  prices  as  any  one  else,  knowing 
nothing  of  the  conditions  governing  the  price  as  it  would  be  if 
the  combination  should  dissolve. 

Moreover  the  opinions  are  not  accompanied  by  facts  to  back 
them,  further  than  the  single  fact  that  the  combination  is  able 
to  underbid  its  competitors  in  certain  localities.  Such  unsup- 
ported opinions  have  no  weight  under  the  rules  governing 
expert  evidence,  as  set  forth  in  T/i^  Conqueror^  166  U.  S.  no, 
130-134,  and  cases  cited. 

Conclusion 

Enough  certainly  has  been  said  to  show  that  this  secret  and 
hypocritical  combination  is  in  violation  of  the  anti-trust  law. 

If  necessary,  it  could  easily  be  established  that  it  is  unlawful 
also  at  common  law,  so  that  the  only  question  that  the  Attorney 
General  would  have  had  to  consider,  had  the  anti-trust  law  never 
been  enacted,  would  have  been  whether  the  injury  to  the  public 


THE    ADDYSTON    PIPE    COMPANY  95 

was  sufficient  to  justify  his  filing  a  bill  upon  general^rinciples 
of  equity,  as  in  the  Debs  case. 

These  water  pipes  and  gas  pipes  belong  to  the  class  of  arti 
cles,  monopolies  in  which  are  especially  disfavored  by  the  law. 
{Gamczvcll  Fire  Alarm  Co.  v.  Crane,  i6o  Mass.,  50,  57.)  Every 
combination  tending  to  prevent  competition  for  public  contracts 
is  absolutely  void.  {Atchesonv.  Mallon,  43  N.  Y.,  147  ;  Whalcn  v. 
Brennan,  34  Neb.,  129,  153.)  Combinations  to  divide  up  terri- 
tory, and  thereby  maintain  rates  free  from  influence  of  compe- 
tition, are  void  per  se  at  common  law,  and  their  validity  does 
not  depend  upon  the  result  of  any  inquiry  as  to  the  percentage 
of  profits  actually  obtained.  {^Hooker  v.  Vandczvater,  4  Denio, 
349;  Stanton  v.  Allen,  5  Denio,  434;  Salt  Co.  v.  Guthrie,  35 
Oh.  St.,  672  ;  Craft  v.  McConnoiighy,  79  111.,  346  ;  Vulcan  Powder 
Co.  V.  Hercules  Poivdcr  Co.,  96  Cal,  510;  Hoffman  v.  Waters, 
II  Weekly  Law  Bulletin,  358;  More  v.  Bennett,  140  111.,  69; 
Bishop  V.  American  Preservers'  Co.,  157  111.,  284;  Nester  v. 
Continental  Brezving  Co.,  161  Pa.  St.,  473  ;  Oliver  v.  Gihnore, 
52  Fed.  Rep.,  562  ;  Anderson  v.  Jett,  89  Ky.,  375  ;  Urmston  v. 
Whitlegge,  63  L.  T.  N.  S.,  455  ;  Chapin  v.  Brown,  83  la.,  156; 
Emery  v.  Ohio  Candle  Co.,  47  Oh.  St.,  320;  Pacific  Factor  Co.  v. 
Adler,  90  Cal,  no;  see  also  Hilton  v.  Eckerslcy,  6  E.  and  B., 
47;  Ford  V.  Chicago  Milk  Shippers'  Association,  155  III,  166; 
Railway  Co.  v.  Raihvay  Co.,  61  Fed.  Rep.,  993  ;  Pittsburg  Car- 
bon Co.  V.  McMillan,  119  N.  Y.,  46;  Santa  Clara  Co.  v.  Hayes, 
76  Cal,  387.) 

Mihvaukee  Masons  and  Builders  Asso.  v.  Niezerozvski,  70 
N.  W.  Rep.,  166,  was  decided  by  the  supreme  court  of  Wisconsin 
on  Febriary  2,  1897.  Sixty  out  of  seventy  or  seventy-five 
mason  contractors  of  Milwaukee  made  an  association,  paying 
into  its  treasury  six  per  cent  on  all  contracts  taken  by  them, 
first  submitting  all  bids  for  work  to  the  association  and  raising 
the  lowest  bid  six  per  cent  before  submitting  it  to  the  owner  or 
architect.  This  was  held  an  unlawful  restraint  of  trade  at 
common  law,  without  the  aid  of  any  statute. 

In  the  famous  case  of  People  v.  North  River  Sugar  Refining 
Co.,  54  Hun,  354,  Judge  Charles  P.  Daly,  the  distinguished 
counsel  for  the  sugar  trust,  conceded  "  that  combinations  are 


96  TRUSTS,   POOLS  AND   CORPORATIONS 

unlawful  the  design  and  effect  of  which  necessarily  is  .  .  . 
to  regulate  and  control  the  price  of  a  commodity  "  ;  and  Judge 
Barrett,  referring  to  this  concession,  said  that  "  all  the  cases, 
ancient  and  modern,  agree  that  a  combination,  the  tendency  of 
which  is  to  prevent  competition  and  to  control  prices,  is  detri- 
mental to  the  public,  and  consequently  unlawful"  (page  370, 
note). 

It  is  therefore  respectfully  submitted  that  this  judgment 
should  be  reversed,  and  a  decree  entered  in  favor  of  the 
plaintiff. 

Edward  B.  Whitney 
Assistant  Attorney-General 


V 

COMBINATION    IN   THE   STEEL    INDUSTRYi 

THIS  case  —  a  proceeding  under  the  Sherman  Anti-Trust 
Law  —  is  largely  one  of  business  facts.  The  construction 
of  that  statute  has  been  settled  by  the  Supreme  Court.  Stajui- 
ard  Oil  Co.  v.  United  States  ;  United  States  v.  American  Tobacco 
Co.  That  construction  has  been  applied  in  this  circuit  in  the 
Keystone  Watch  Case  ^  and  the  Powder  Trust  Case.  It  follows, 
therefore,  that  our  duty  is  largely  one  of  finding  the  facts  and 
to  those  facts  applying  settled  law. 

The  tests  of  the  violation  of  this  statute  having  then,  as  we 
have  seen,  been  adjudged  by  the  Supreme  Court,  namely,  whether 
the  acts  in  question  "  prejudice  the  public  interests  by  unduly 
restricting  competition  or  unduly  obstructing  the  course  of 
trade,"  it  would  appear  the  questions  of  fact  for  us  to  determine 
from  the  evidence  are  these  : 

First.  Was  the  Steel  Corporation,  when  this  bill  was  filed  in 
191 1,  prejudicing  the  pubHc  interests  by  unduly  restricting  com- 
petition, or  unduly  obstructing  the  course  of  the  steel  and  iron 
trade,  between  the  states,  or  with  foreign  nations  ?  If  this  ques- 
tion be  answered  "  Yes,"  the  law  was  then  being  violated,  and 
an  injunction  should  issue  to  restrain  present  and  future  vio- 
lations. 

Second.  Did  the  Steel  Corporation,  when  it  was  formed  in 
1901,  either  by  the  intent  of  those  forming  it,  or  by  the  inherent 
nature  of  that  company's  contemplated  acts,  prejudice  the  pub- 
lic interests  by  unduly  restricting  competition  or  unduly  obstruct- 
ing the  course  of  the  steel  and  iron  trade,  interstate  or  foreign  1 

1  U.  S.  V.  U.  S.  Steel  Corporation,  U.  S.  Dist.  Court,  N.  J.  decided  June  3,  1915; 
223  Federal  Reporter,  55.  Elaborate  details  are  also  given  in  the  U.  S.  Bureau  of 
Corporations,  Report  on  the  Steel  Industry,  July  I,  191 1.  Stevens,  op.  cit.,  chapter 
VI,  reprints  testimony  of  Gates,  Gary,  Schwab,  and  Carnegie  before  the  Stanley 
Committee.  ^  These  cases  are  reported  in  Chapter  XVII,  infra. 

97 


98  TRUSTS,    POOLS   AND   CORPORATIONS 

If  this  question  be  answered  "  Yes,"  then  the  law  was  violated, 
and  the  Steel  Corporation  must  be  adjudged  originally  illegal. 
If  illegal,  it  must  be  dissolved,  because  only  thus  can  its  inher- 
ent nature  be  prevented  from  continuing  to  work  further  viola- 
tions of  the  statute.  On  the  other  hand,  if  these  questions  are 
negatived,  then  the  Steel  Corporation  should  not  be  dissolved, 
but  permitted  to  pursue  that  usual  course  of  trade,  which  it  was 
the  purpose,  as  we  have  seen,  of  this  statute  to  protect.  It  will 
thus  be  seen  that,  as  stated  at  the  outset,  this  case  is  practically 
one  of  business  facts. 

Turning,  then,  to  the  first  question,  let  us  address  ourselves, 
first,  to  the  iron  and  steel  trade  here  in  the  United  States,  and 
inquire  whether  the  evidence  satisfies  us  that  the  Steel  Corpora- 
tion, when  this  bill  was  filed  in  191 1,  was  then  prejudicing  the 
public  interests  by  unduly  restricting  or  unduly  obstructing  the 
steel  and  iron  business  of  the  United  States.  In  considering 
that  question,  a  number  of  fields  of  inquiry  naturally  suggest 
themselves.  Had  this  company  in  191 1  a  monopoly  of  the 
steel  and  iron  trade  of  the  country  ?  What  had  been  and  was 
then  its  business  conduct  towards  its  competitors?  Was  it  fair 
or  unfair.?  Had  it  forced  or  was  it  forcing  others  out  of  the 
steel  trade  by  unfair  conduct  ?  Had  it  prevented  others  from 
entering  it  ?  Was  it  then  exacting  or  had  it  exacted  from  the 
public  undue  prices  for  its  products  ?  Had  it  lowered  the  char- 
acter of  its  product .''  Had  it  cut  down  or  was  it  cutting  down, 
its  output  so  as  to  restrict  proper  supply .''  Had  it  taken  advan- 
tage of  its  power  to  unduly  reduce  wages .-'  All  these,  as  we 
have  seen  from  the  Standard  Oil,  the  Tobacco,  the  Powder,  and 
Keystone  Watch  cases,  were  inquiries  by  which  the  question 
could  be  determined  whether  the  Steel  Corporation  was  acting, 
as  the  Supreme  Court  said  in  the  Standard  Oil  case,  with  "  the 
legitimate  purpose  of  reasonably  forwarding  personal  interest 
and  developing  trade,"  or,  on  the  other  hand,  "  with  the  intent 
to  do  wrong  to  the  general  public  and  to  Hmit  the  right  of 
individuals." 

Now  as  trade  is  a  contest  for  it  between  different  persons, 
and  the  gain  of  that  trade  by  one  means  the  loss  of  it  to  another, 
it  follows  that  the  person  who  best  knows  whether  the  man  who 


COMBINATION    IN    THE   STEEL   INDUSTRY  99 

gained  it,  gained  it  fairly,  is  the  man  who  lost  it.  Ji^  there  is 
monopoly,  if  unfair  business  methods  exist,  if  the  course  of  trade 
and  fair  trading  is  throttled,  we  can  find  proof  of  it  from  business 
competitors.  Trade  competitors  are  the  first  to  feel  the  pinch 
of  unequal,  unfair,  and  undue  restraint  of  the  natural  and  nor- 
mal course  of  trade.  Being  the  first  to  suffer,  they  are  the 
keenest  to  condemn.  Turning,  then,  to  this  Steel  Corporation's 
competitors,  let  us  decide  from  the  proofs  whether  the  Steel 
Corporation  had,  when  this  bill  was  filed,  a  monopoly  of  the 
iron  and  steel  business  of  the  United  States. 

We  turn,  first,  to  finished  rolled  products,  because  they  are 
the  basic  supply  to  the  vast  number  of  varied  industries  through- 
out the  country  dependent  thereon.  If  all  these  minor  indus- 
tries are  dependent  on  a  monopolized  source  of  an  indispensable 
base,  we  can  say,  without  going  further,  that  not  only  such 
industries,  but  the  general  pubHc,  are  prejudiced ;  for,  as  said 
and  held  by  the  Supreme  Court  in  the  Tobacco  case,  wrongful 
purpose  and  illegal  combination  are  estabhshed  "  by  the  gradual 
absorption  of  control  over  all  the  elements  essential  to  the  suc- 
cessful manufacture  of  tobacco  (steel)  products." 

What,  then,  are  the  facts  in  reference  to  finished  rolled  prod- 
ucts.?  In  that  regard,  the  evidence  is  that  in  191 1  the  finished 
rolled  product  —  which  excludes  pig  iron,  steel  castings,  and 
ingots  —  of  the  United  States  (using  in  this  opinion,  when  quot- 
ing figures,  round  numbers,  and  by  the  term  "  Steel  Company," 
or  "Steel  Corporation,"  meaning  the  United  States  Steel  Cor- 
poration) was  19,000,000  tons.  Of  this  tonnage  the  competitors 
of  the  Steel  Corporation  produced  54  per  cent,  or  10,300,000 
tons,  while  the  Steel  Corporation  made  8,700,000  tons ;  but 
not  only  did  its  competitors  produce  in  191 1  the  major  part  of 
the  country's  finished  rolled  product,  as  above,  but  judging  from 
the  past,  the  present  proportionate  lead  of  the  competitors  bids 
fair  to  increase.  In  1901,  when  the  Steel  Company  was  formed, 
the  total  finished  roll  product  of  the  United  States  was  13,000,. 
000  tons.  This  was  substantially  divided  between  49.9  per  cent 
made  by  its  competitors,  and  50.1  per  cent  by  the  Steel  Com- 
pany. While  both  together  have  since  increased  the  nation's 
product  from  13,000,000  to  19,000,000  tons,  yet  of  this  6,000,000 


100  TRUSTS,   POOLS  AND   CORPORATIONS 

increase  its  competitors  produced  3,400,000  tons  to  the  Steel 
Company's  2,600,000  tons. 

Taking  steel  ingots,  another  basic  supply  on  which  great 
numbers  of  finishing  industries  are  ultimately  dependent,  we 
find  that  while  in  1 901,  of  the  13,000,000  tons  of  the  total  Ameri- 
can ingot  production,  the  competitors  of  the  Steel  Company  only 
made  4,500,000  tons,  as  against  the  Steel  Company's  8,500,000, 
yet  by  191 1,  in  the  country's  vast  increase  from  13,000,000  to 
24,000,000  tons,  the  competitors  had  increased  their  production 
by  6,500,000  tons,  while  the  Steel  Company  had  only  increased 
4,500,000.  In  other  words,  while  the  Steel  Company  produced 
in  1 90 1,  66  per  cent  of  the  country's  ingot  production,  it  was 
producing  but  54  per  cent  in  191 1. 

In  pig  iron,  the  basic  supply  of  foundries,  finishing  mills,  and 
other  dependent  industries,  the  relations  were  sHghtly  the  other 
way.  In  191 1,  out  of  a  total  cast  of  22,000,000  tons  of  pig  iron, 
only  12,000,000,  or  54.8  per  cent,  were  made  by  competitors  of 
the  Steel  Company,  as  against  9,000,000,  or  56.8  per  cent,  made 
by  such  competitors  in  1901,  out  of  a  total  of  16,000,000  —  a 
decrease  of  2  per  cent. 

These  facts  and  figures  bearing  on  basic  supplies  of  the  coun- 
try's dependent  iron  and  steel  industries  satisfy  us  that  there  is 
no  monopolistic  control  anywhere  of  such  basic  factors  as  ingots, 
pig  iron,  and  finished  rolled'  products,  and  the  testimony  here- 
after referred  to  satisfies  us  that  any  substantial  producer  of 
such  basic  articles  can,  by  selling  such  products  at  such  lower 
price  as  he  sees  fit,  compel  all  producers  of  such  supplies,  in- 
cluding the  Steel  Corporation,  to  also  lower  their  prices.  So, 
also,  monopolistic  control  of  finished  steel  articles  in  wide  use 
would  be  a  matter  of  grave  pubhc  prejudice.  Taking  for 
example,  wire  production,  in  which,  through  fencing,  nails,  and 
the  great  range  of  articles  made  from  wire  products,  so  many 
people  are  interested.  When  the  Steel  Corporation  was  formed 
in  1 90 1,  of  the  9,000,000  kegs  of  wire  nails  then  made  in  the 
United  States,  the  competitors  of  the  Steel  Corporation  made 
3,000,000  kegs,  and  the  Steel  Corporation  6,000,000.  By  loii, 
the  country's  production  had  grown  to  13,000,000,  but  of  the 
3,500,000  of  increase  the  Steel  Corporation  made  1,000,000  as 


COMBINATION    IN   THE   STEEL   INDUSTRY  lOi 

against  its  competitors  making  2,500,000.  The  net'i^sult  was 
that,  when  this  bill  was  filed,  the  Steel  Corporation's  competitors 
had  6,500,000  and  the  Steel  Corporation  7,000,000  of  the  coun- 
try's total  production  of  13,500,000  kegs.  So  of  wire  netting, 
fencing,  and  other  wire  products  in  general  use.  The  general 
average  of  the  nation's  total  production  made  by  competitors 
when  this  bill  was  filed  was  78  per  cent.  It  will  be  seen  that  in 
this  particular  respect,  due,  no  doubt,  as  we  shall  see,  to  the 
growth  of  its  foreign  trade  in  wire  products,  the  Steel  Corpora- 
tion had  slightly  increased  its  proportion  from  20  per  cent  of 
the  total  product  in  1 901  to  22  per  cent  in  191 1.  But  at  the 
same  time  it  will  be  noted  that,  as  the  very  large  part  of  the 
Steel  Corporation's  increase  in  wire  products  was  made  in  for- 
eign trade  —  the  proofs  (volume  10,  p-  3902)  show  that  only 
42  per  cent  of  the  Steel  Corporation's  wire  product  of  191 1  was 
sold  in  the  United  States  —  it  was  in  191 1  making  relatively 
much  less  of  the  wire  products  consumed  in  the  United  States 
than  it  was  in  1901. 

In  the  important  item  of  structural  steel,  used  in  bridges,  steel 
framed  buildings,  steel  car  frames,  etc.,  the  steel  corporation's 
competitors  produced  about  ^y  per  cent,  and  the  Steel  Corpora- 
tion 33  per  cent.  And  for  the  same  reason  as  shown  above,  in 
the  growth  of  the  foreign  trade,  it  will  be  seen  by  an  analy- 
sis of  Defendant's  Exhibit  (Vol.  3,  p.  317,  and  Vol.  2,  p.  204) 
that  in  structural  shapes,  as  in  wire  products,  the  Steel  Com- 
pany was  in  191 1  making  relatively  less  structural  articles  of 
this  country's  consumption  than  it  was  in  1901. 

So,  also,  in  steel  rails.  In  1901,  the  competitors  of  the  Steel 
Company  made  1,100,000  tons  of  steel  rails,  and  the  Steel  Com- 
pany 1,700,000.  In  191 1,  its  competitors  made  1,200,000  tons, 
an  increase  of  100,000  tons,  while  the  Steel  Company  made 
1,600,000  tons,  a  decrease  of  100,000  tons. 

Summarizing  our  study  of  the  proofs  of  this  general  subject, 
of  the  relative  part  of  the  Steel  Company  and  its  competitors  in 
the  total  iron  and  steel  production  of  the  country,  and  their  rela- 
tive part  in  the  home  market,  we  find  that,  taking  the  ten  years 
from  1901,  when  the  Steel  Company  was  formed,  until  191 1, 
when  the  Attorney-General  filed  this  bill  to  dissolve  it,  its  com- 


I02  TRUSTS,    POOLS   AND   CORPORATIONS 

petitors,  starting  in  1901,  with  making  49.9  per  cent  of  the  na- 
tion's production  of  finished  rolled  product,  including  structural 
materials,  rails,  sheets,  rods,  and  bars,  had  by  191 1  so  increased 
their  relative  proportion  that  they  were  then  producing  54,3  per 
cent  of  the  nation's  iron  and  steel  output.  And  confining  our- 
selves for  the  present  to  the  production  of  191 1,  used  in  the 
trade  of  the  United  States,  which  alone  we  are  now  considering, 
we  find  that,  of  the  total  amount  of  such  iron  and  steel  prod- 
ucts in  the  whole  market  in  that  year,  nearly  60  per  cent  was 
produced  by  the  competitors  of  the  Steel  Company.  These 
conclusions,  based  as  they  are  on  proven,  practical  business 
facts  and  figures,  show  a  strong  trend  away  from  any  monopo- 
listic absorption  or  trade-restraining  control  of  iron  and  steel 
manufacture  or  markets^of  the  United  States  by  the  Steel  Cor- 
poration. On  the  contrary,  these  figures  show  a  strong  trend 
in  that  manufacture  and  market  toward  an  even  greater  absorp- 
tion thereof  by  the  virile  and  growing  competitors  of  the  Steel 
Company.  And  this  leads  us,  in  an  adequate  discussion  of  the 
case,  to  at  this  point  take  up  the  character  of  the  competition  in 
the  steel  and  iron  business  in  this  country ;  for  we  may  rest 
assured  of  the  practical  fact  that  where  in  any  business  there 
exists  a  healthy,  normal,  unrestrained,  and  virile  competition, 
which  all  are  free  to  enter,  the  individual  has  full  freedom  of 
business  opportunity  and  the  public  is  in  no  danger  of  prejudice 
from  monopoly  or  trade  restraint. 

When  the  steel  business  of  the  United  States  is  referred  to, 
one  thinks  of  it  as  practically  being  in  the  hands  of  the  United 
States  Steel  Corporation.  Circumstances  have  made  this  natu- 
ral. The  manufacture  of  iron  and  steel  in  their  basic  form  is 
confined  to  local  districts.  Outside  of  these  localities  and  out- 
side of  those  engaged  in  the  steel  business,  there  was,  prior  to 
1 90 1,  but  little  general  knowledge  or  appreciation  of  its  magni- 
tude and  its  basic  relation  to  the  general  business  of  the  country. 
When,  therefore,  this  great  steel  company  was  quickly  formed 
in  that  year  and  became  at  once  the  largest  corporate  capitaliza- 
tion known,  it  naturally  and  at  once  became  associated  in  the 
general  mind  with  absolute  monopolistic  control.  But  the  fact 
that  the  Steel  Corporation  after  due  selection  by  it  of  such  lines 


COMBINATION    IN   THE   STEEL   INDUSTRY  103 

of  finishing  mills  as  were  deemed  necessary  to  carry  ou^its  plans 
left  outside  of  it  a  most  strenuous  body  of  strong  competitors 
was  not  then  generally  recognized.  The  names,  location,  and 
resources  of  those  competitors  were  not  then,  and  indeed  are 
not  now,  known  to  those  outside  the  steel  and  iron  business. 
Nor  was  the  significance  of  the  anti-monopoly  competitive  pow- 
ers and  policies  of  such  competitors  appreciated.  Indeed,  the 
business  fact  above  found,  namely,  that  in  191 1,  when  this  bill 
was  filed,  the  competitors  of  the  Steel  Company  were  making 
and  marketing  nearly  60  per  cent  of  the  steel  and  iron  produced 
in  the  United  States,  would  surprise  many.  Since  therefore  the 
gist  of  monopoly  is  the  suppression  of  competition,  we  deem  it 
pertinent  to  ascertain  from  the  proofs  the  character  and  steady 
increase  of  competition  in  the  iron  and  steel  business  since  the 
Steel  Corporation  was  formed.  In  doing  this,  we  here  note  of 
its  great  competitors  such  only  as  have,  in  the  ten  years  of  com- 
petition between  them  and  the  Steel  Corporation,  made  a  higher 
proportionate  gain  of  business  than  the  Steel  Corporation  itself. 
Taking  the  Steel  Corporation  as  the  basis  of  comparison,  we 
may  say  that  while  the  proofs  show  a  very  material  increase  of 
40-odd  per  cent  in  the  Steel  Corporation's  business  from  1901  to 
191 1,  yet  this  very  substantial  increased  percentage  of  the  Steel 
Corporation's  own  business  was  less  than  that  made  by  each  of 
its  great  competitors  as  follows  : 


Company 

Location 

Increase  of  Pro- 
duction FROM 

Percentage 
OF  Increase 

Bethlehem  Steel  Co. 

So.  Bethlehem,  Pa. 

1901  to  1913 

37797 

Inland  Steel  Co. 

Indiana  Harbor,  Ind. 

igoi  to  1913 

1495-9 

La  Belle 

V^heeling,  W.  Va. 

1901  to  1913 

463-4 

Jones  &  Laughlin 

Pittsburgh,  Pa. 

1901  to  1912 

206.7 

Cambria  Steel 

Johnstown,  Pa. 

1901  to  1913 

155-5 

Colorado  Co. 

Pueblo,  Colo. 

1901  to  1912 

152.8 

Republic  Iron  &  Steel  Co. 

Youngstown,  Ohio 

1901  to  1912 

90.8 

Lackawanna  Steel  Co. 

Buffalo,  N.Y. 

1901  to  1911 

63.2 

Taking  up  these  companies  one  by  one,  it  will  be  seen  that  in 
location,  facilities,  capital,  and  basic  supplies,  they  show  such 
strong  past,  present,  and  prospective  competition  as  affords  just 
ground  for  concluding  that  the  steel  and  iron  business  of  this 
country  is  not  being,  and  indeed  cannot  be,  monopolized  by  the 


104  TRUSTS,   POOLS  AND   CORPORATIONS 

Steel  Corporation.  For  the  real  test  of  monopoly  is  not  the  size 
of  that  which  is  acquired,  but  the  trade  power  of  that  which  is 
not  acquired. 

Turning,  first,  to  the  Atlantic  seaboard,  we  find  there  is  a 
competitive  group  composed  of  the  Bethlehem  Steel  Company, 
the  Pennsylvania  Steel  Company  and  its  subsidiary,  the  Mary- 
land Steel  Company.  The  two  latter  companies  are  additional 
to  the  above  Hst,  and  are  here  referred  to  only  to  note  their  tide- 
water location  as  an  advantage  which  the  Steel  Corporation  with 
its  inwardly  located  works  does  not  possess.  The  works  of  the 
Pennsylvania  Steel  Company  are  near  Harrisburg,  Pa.,  and  those 
of  the  Maryland  Steel  Company  at  Sparrows  Point  near  Balti- 
more. These  two  companies  have  a  combined  capital  and  sur- 
plus of  some  ;^66,ooo,ooo  and  with  large  extensions  in  view. 
Their  ore  supplies  are  drawn  from  the  great  Cornwall  ore  beds 
of  Eastern  Pennsylvania,  and  from  Cuba,  where  they  have  inex- 
haustible supplies  of  Bessemer  ore,  which  can  be  worked  by 
steam  shovels  and  are  close  to  tidewater.  Three  matters  have 
impressed  us  in  reference  to  this  seaboard  competition :  First, 
that  the  eastern  seaboard  iron  and  steel  competition  of  the  Steel 
Corporation  has  an  ore  supply  wholly  independent  of  Lake 
Superior ;  second,  that  their  location  near  the  seaboard  gives  in 
many  cases  substantial  freight  advantage  over  the  Steel  Corpo- 
ration;  and,  thirdly,  that  the  greatest  advance  in  ore  and  steel 
production  in  the  past  ten  years  has  been  made  by  a  seaboard 
competitor  of  the  Steel  Corporation,  the  Bethlehem  Steel  Com- 
pany. And  as  bearing  on  the  question  of  the  alleged  object  of 
those  who  originally  formed  the  Steel  Corporation  to  monopolize 
and  unduly  restrain  competition  and  obstruct  trade,  it  is  to  be 
noted  that  the  striking  growth  and  development  of  the  Bethle- 
hem company  was  undertaken  by  one  who  helped  form  the 
Steel  Corporation,  who  served  as  its  first  president,  and  who,  if 
the  object  for  which  the  Steel  Corporation  was  formed  was  to 
monopolize  the  iron  and  steel  business  or  to  restrain  trade,  was 
warned  of  that  intent.  That  such  a  man  should  attempt  to  build 
up  a  competitive  business  and  succeed  in  expanding  it  as  has 
been  done  shows  that  he  at  least  was  convinced  that  the  field  of 
fair,  free,  and  full  competition  was  open  to  him  and  others  who 


COMBINATION    IN   THE   STEEL   INDUSTRY  105 

desired  to  enter  the  steel  business,  and  that  the  Steel  6t7Tporation 
had  neither  the  business  purpose  nor  the  business  power  to 
monopolize  the  steel  business  or  to  throttle  the  growth  of  com- 
petition. 

As  we  shall  see  later,  the  market  reach  of  basic  iron  and  steel 
plants  is  measurably  restricted  to  its  own  district  by  freight  limi- 
tations. The  supplies  from  which  steel  is  made  and  the  basic 
articles  into  which  it  is  turned  are  of  such  bulk  and  weight  as  to 
thus  localize  or  restrict  their  markets.  Freight  forbids  such 
heavy  product  being  hauled  to  far-removed  markets.  The  exist- 
ence and  maintenance  of  strong  competitive  steel  production 
on  the  seaboard  is  therefore  a  matter  of  grave  import  to  the 
great  section  of  the  United  States  immediately  tributary  to  the 
Atlantic  Coast,  Into  this  seaboard  region  the  Steel  Corporation 
enters  under  freight  burden,  its  bulk  mills  being  substantially 
in  the  Chicago  and  Pittsburgh  districts.  The  proofs  show  that 
its  seaboard  competitors  named  have,  as  noted,  abundant  ore 
supplies,  cheap  water  freights,  and  a  great  accessible  surround- 
ing market.  Without  entering  into  detail,  we  refer  to  some 
suggestive  facts  in  the  proofs.  For  example,  the  proofs  show 
that  the  Maryland  Steel  Company,  through  its  coast  line  water 
freight  of  $2.50  per  ton,  so  covers  the  territory  supplied  by 
Mobile,  Galveston,  and  other  Gulf  of  Mexico  distributing  points 
as  to  exclude  from  that  territory  even  the  product  of  the  Tennes- 
see Coal  &  Iron  Company,  now  owned  by  the  Steel  Corporation, 
which  pays  a  railroad  freight  of  $3.40  per  ton.  The  proofs 
further  show  that,  with  the  enlargement  of  the  Erie  Canal  sys- 
tem. Lake  Superior  ore  will  be  canal  freighted  from  Buffalo  to 
New  York  harbor  at  28  cents  a  ton  less  than  the  same  ore  is 
rail  freighted  from  Lake  Erie  ports  to  the  Pittsburgh  district. 
With  the  enlargement  of  that  canal,  the  proofs  are  that  blast 
furnaces  are  now  planned  for  location  on  seaboard  waters  in 
New  York  harbor  hmits.  And  it  should  be  here  noted  that  the 
proof  is  that  the  whole  steel  industry  of  the  United  States  could 
be  duplicated  on  the  Atlantic  seaboard  and  inland  as  far  as 
Pittsburgh,  and  could  be  run  on  ores  brought  from  Chili  and 
Brazil  alone.  Lake  Superior  ores  of  the  same  metallic  unit 
grade  as  the  Brazilian  would,  in  the  view  of  the  Michigan  Tax 


io6  TRUSTS,    POOLS   AND   CORPORATIONS 

Commission,  cost  $"]  a  ton  delivered  at  the  Atlantic  seaboard, 
as  against  ore  of  $3  from  Brazil,  which  the  report  states  has 
"  a  tremendous  field  of  high  grade  Bessemer  iron  ores  running 
65  to  68  per  cent  metallic  iron."  As  to  the  Cuban  ore,  the 
proof  is : 

The  total  cost  will  not  in  any  case  exceed  $2.25  per  ton,  and  in 
ordinary  shipping  seasons  will  probably  not  exceed  $2.10  per  ton. 
This  means  that  the  ore  reaches  Philadelphia  at  a  net  cost  of  4  cents 
per  unit  of  iron.  It  is  the  cheapest  ore  supply  in  the  world  delivered 
at  eastern  Atlantic  ports  or  in  German  or  English  ports.  ...  In 
normal  years,  Lake  Superior  ores  at  the  extreme  eastern  point  at 
which  they  could  possibly  be  shipped  to  meet  eastern  or  foreign  ores 
would  have  to  get  a  price  of  9  cents  a  unit  in  order  to  compete. 

These  facts  and  figures  show  that  there  is  no  basis  on  which 
to  attempt  ore  monopoly.  The  proofs  further  show  that,  to 
adequately  enter  this  seaboard  territory  and  meet  the  competi- 
tion of  those  located  on  the  seaboard,  the  Steel  Corporation  was 
forced  to  establish  large  local  distributing  warehouses  on  the 
seaboard.  For  example,  the  corporation  had  established, 
amongst  several  others,  warehouses  on  the  Atlantic  Coast  near 
New  York  carrying  $2,000,000,  and  one  at  San  Francisco  carry- 
ing $4,000,000  of  diversified  steel  products. 

Proof  of  the  strength  and  growth  of  this  seaboard  competition 
is  found  in  the  record  of  the  Bethlehem  Steel  Company.  That 
company  in  1901,  its  first  year  of  competition  with  the  Steel 
Corporation,  made  18,000  tons  of  finished  steel  product,  which 
was  largely  confined  to  rails.  By  191 3,  it  had  increased  its 
product  to  700,000  tons.  During  that  time  it  had  also  en- 
tered into  competition  in  structural  steel,  armor  plate,  and 
varied  steel  products.  Indeed,  its  chief  products,  structural 
steel,  and  open-hearth  rails,  of  which  it  is  making  200,000 
tons,  have  been  developed  since  1908.  From  4,000  employees 
it  has  grown  to  15,000;  it  has  in  view  further  integration  to 
the  extent  of  making  all  the  finished  products  made  by  the 
Steel  Corporation.  Its  ore  supply  of  a  million  and  a  half 
tons  a  year  comes  from  Sweden,  from  the  Adirondack  regions 
in  New  York,  from  Chih,  and  from  Cuba,  where  it  has  practi- 


COMBINATION    IN    THE   STEEL   INDUSTRY  107 

cally  inexhaustible  reserves.  The  proofs  as  to  these-'€iiilean  ore 
fields  show  that  this  corporation  and  other  tidewater  steel  plants 
are  wholly  independent  of  Lake  Superior  reserves.  The  Chilean 
beds  outcrop ;  they  are  stripped  instead  of  mined ;  they  are 
within  a  short  distance  of  the  coast  to  which  they  are  gravity 
dropped.  They  are  magnetic,  hematite,  and  dry  —  a  great  sav- 
ing in  transportation,  as  will  be  appreciated  by  those  familiar 
with  the  wetness  of  Lake  Superior  ores  which  necessitate  the 
carrying  of  thousands  of  tons  of  water.  The  proofs  show  the 
substantial  character  of  this  competitor  with  a  surplus  and  capi- 
tal of  ;^5  5,000,000  and  further  integration  in  view. 

Referring  at  this  point  to  the  existence  of  a  fair  and  open 
competitive  field,  as  sensed  by  practical  men  in  the  iron  and 
steel  industry,  we  gain  light  from  the  proofs  in  reference  to  the 
Youngstown  Sheet  &  Tube  Company  of  Youngstown,  Ohio. 
That  company  does  not  appear  in  the  foregoing  list  because  it 
came  into  existence  after  the  Steel  Corporation  was  formed.  It 
is  an  inland  company.  Its  ore  supply  is  from  Lake  Superior. 
It  started  the  year  after  the  Steel  Corporation  was  formed.  It 
purchased  its  reserve  ore  supply  in  1903.  It  began  with  an 
investment  of  $600,000,  which  in  the  succeeding  years  has  been 
increased  to  over  $29,000,000.  By  191 3,  it  had  an  annual  capac- 
ity of  1,000,000  tons  of  ingots  and  sold  that  year  over  800,000 
tons.  This  company  is  cited  as  evidencing  three  things:  First, 
that  the  men  in  the  steel  and  iron  trade  immediately  after  the 
Steel  Corporation  was  formed  felt  they  had  an  opportunity  to 
enter  and  prosper  in  the  steel  and  iron  business,  both  in  the 
home  and  foreign  markets ;  second,  they  felt  secure  about  their 
basic  ore  supply ;  and,  third,  they  were  free  to  and  did  build 
up  a  great  business  in  making  steel  ingots,  one  of  the  primary 
products  or  bases. 

Coming  next  to  the  Pittsburgh  district,  we  find  a  strong  com- 
petitor of  the  Steel  Corporation  in  the  Jones  &  Laughlin  Com- 
pany, which,  at  the  time  of  the  Steel  Company's  formation, 
the  proofs  show  was  then  so  integrated  as  to  make  "  a  greater 
variety  of  product  than  any  other  steel  or  iron  company  in  the 
country."  In  1901,  its  finished  product  alone  was  nearly  one 
half  million  tons.     By  191 2,  it  had  increased  that  production  to 


I08  TRUSTS,    POOLS   AND   CORPORATIONS 

one  and  a  half  million  tons.  During  that  time  it  had  integrated 
still  further  by  building  large  additional  works  and  had  entered 
into  competition  with  the  Steel  Company  and  others  in  the 
manufacture  of  tin  plate  and  wire  rods.  Like  all  these  other 
competitors  mentioned,  the  Jones  &  Laughlin  Company  is  thor- 
oughly "integrated";  that  is,  it  has  its  own  basic  supplies  and 
carries  on  its  work  in  continuous  process  from  ore  to  diversified 
finished  steel  products.  It  has  large  reserve  holdings  of  ore  in 
the  Lake  Superior  region  and  an  ore  fleet  on  the  Great  Lakes 
with  a  carrying  capacity  of  40,000  tons.  It  has  over  $50,000,000 
capital  and  a  large  surplus. 

The  history  of  the  next  company  is  illustrative  of  the  feeling 
of  confidence  and  security  among  practical  steel  men,  which 
warranted  them  in  making  since  the  Steel  Corporation  was 
formed  large  expenditures  and  entering  into  competition  in  the 
steel  business.  The  Republic  Iron  &  Steel  Company  of  Youngs- 
town,  Ohio,  was,  in  1901,  engaged  principally  in  making  iron. 
Its  finished  product  that  year  was  some  500,000  tons.  It  has 
since  expended  $25,000,000  in  changing  its  business  from  iron 
?o  an  exclusively  steel  one.  Like  all  other  steel  makers,  the 
Republic  company's  pohcy  has  been  one  of  simply  following 
the  progressive  and  universal  practice  of  integration  incident  to 
the  development  of  the  use  of  steel.  The  Republic  company's 
process  of  integration  its  president  well  describes : 

We  have  practically  eliminated  all  our  scattered  iron  mills,  have 
concentrated  them  in  the  operation  at  a  few  points  of  production.  So, 
to-day  we  produce  practically  but  little  iron  and  are  manufacturing 
about  1,000,000  tons  of  steel  per  annum.  This  is  what  we  call  an 
integrating  process  ;  that  was  part  of  it,  the  addition  of  the  mineral 
and  coke  and  blast  furnaces,  and  balancing  up  operations  generally, 
completing  the  integrating  process.  .  .  .  This  integrating  process 
that  I  speak  of  attended  our  development  of  the  steel  end  of  our 
business.  We  did  not  need  it  so  much  when  we  were  simply  manu- 
facturing iron.  It  was  done  for  economic  and  trade  reasons,  on 
account  of  the  increased  demand  for  steel  and  the  decreased  demand 
for  iron. 

The  Republic  has  increased  the  range  of  its  product  and 
production  until  it  is  now  a  miUion  and  a  quarter  tons  and  ex- 


COMBINATION    IN   THE   STEEL   INDUSTRY  109 

tends  all  over  the  United  States  and  Canada.  It  has  gone  into 
the  Birmingham,  Ala.,  field,  where  it  has  plants,  as^ell  as  in 
Pennsylvania,  Missouri,  Illinois,  Indiana,  Iowa,  and  Michigan. 
It  has  acquired  40,000,000  tons  of  Lake  Superior  ore  reserve 
and  80,000,000  in  the  Birmingham  district,  and  has  a  lake  fleet 
of  18,000  tons.  Its  growth  during  this  time  was  such  that  it  is 
producing  one  twenty-fifth  of  all  the  steel  produced  in  the 
United  States  and  one  thirtieth  of  all  the  iron.  From  a  study 
of  the  testimony  there  is  no  doubt  that  the  men  who  made  these 
large  expenditures  in  1906  were  satisfied  that  the  field  of  fair 
business  competition  in  the  iron  and  steel  business  was  open  to 
them.  These  expenditures  were  made  in  completely  integrat- 
ing its  manufacturing  facilities.  This  integration  consisted  in 
increasing  its  blast  and  open  hearth  furnaces  and  ore  supply 
and  carrying  their  basic  product  forward  to  completion  by  addi- 
tional plants  which  included  finishing  mills  for  merchant  bar, 
for  sheet  bar,  for  billets,  and  for  plate  in  addition  to  galvaniz- 
ing works,  rivet,  spike,  bolt,  and  nut  departments,  and  by- 
product coke  works.  They  have  no  more  to  fear  from  the 
competition  of  the  Steel  Corporation  than  they  have  from  that}' 
of  any  other  of  their  other  competitors.  The  testimony  of  this 
company's  president,  who  like  the  Cambria's  president,  was 
called  as  a  witness  both  by  the  government  and  the  Steel  Com- 
pany, is  instructive,  on  that  point.     It  is  : 

Q.   Where  is  the  market  for  your  product  ? 

A.   All  over  the  United  States  and  Canada. 

Q.  Has  the  Steel  Corporation  in  your  opinion  power  to  put  the 
Republic  out  of  business  ? 

A.    I  think  not. 

Q.  Has  it  the  power  to  put  its  competitors  generally,  or  any  of  its 
principal  competitors,  out  of  business  ? 

A.    I  would  say  not. 

Q.    What  is  your  reason  for  thinking  that  they  have  not  that  power  ? 

A.  I  would  have  two  reasons  :  One,  that  they  have  not  the  physical 
ability  to  do  it ;  and,  secondly,  if  they  attempted  it,  they  would  involve 
their  own  market  to  such  an  extent  that  they  would  suffer  equally 
with  us.  What  I  mean  by  physical  is  this  :  Their  principal  competi- 
tion, companies  like  ourselves  and  others  as  strong  as  we  are,  are 
properly    integrated;    in   other  words,   being  self-contained   on   raw 


no  TRUSTS,    POOLS   AND   CORPORATIONS 

material,  well  equipped,  and  at  least  fairly  well  managed  and  properly 
financed,  so  that  a  combination  of  that  kind  would  give  us  as  much 
power  to  produce  within  somewhere  a  close  approximation  of  their 
cost ;  at  least  their  difference  would  not  be  so  great  that  they  could 
put  us  out  of  business.     They  have  some  advantages,  and  so  have  we. 

Q  Now,  as  to  your  second  reason,  that  it  would  involve  them  in 
loss  as  well  as  you,  what  do  you  mean  by  that  ? 

A.  Well,  to  illustrate,  we  might  have  a  customer,  we  will  say,  in 
Michigan,  engaged  in  the  manufacture  of  agricultural  implements,  and 
another  one  in  Illinois  or  Indiana.  If  we  should  sell  in  Michigan 
steel  bars  and  plates  that  enter  into  the  cost  of  production  of  a 
machine  at  a  less  price  to  A  in  Michigan,  than  we  do  to  B  in  Illinois, 
we  would  probably  soon  hear  from  B  in  Illinois,  because  those  two 
men  would  naturally  compete  in  the  general  market  of  the  United 
States  with  their  machinery.  So  it  would  be  with  all  other  fabricated 
products  made  from  steel,  the  markets  are  interrelated  and  interlaced 
to  such  an  extent  that  you  cannot  reduce  prices,  in  my  judgment,  in 
one  market,  without  affecting  in  a  short  time  the  market  elsewhere 
for  the  same  commodity. 

Q.  Could  the  Steel  Corporation  localize  a  destructive  warfare 
against  its  competitors  ? 

A.    Not  in  my  opinion. 

Q.  Why  not,  if  there  is  any  other  reason  than  you  have  already  in- 
dicated ? 

A.  I  should  say  that  the  reason  I  have  already  indicated  would  be 
a  complete  answer  to  that  thought.  There  is  a  sympathetic  relation- 
ship existing  between  all  markets  that  is  so  close  that  my  experience 
would  compel  me  to  say  that  you  could  not  affect  the  price  in 
Chicago  without  affecting  the  price  in  New  York.  As  a  matter  of 
fact,  that  is  the  experience  that  we  have  had. 

Q.  And  could  the  Steel  Corporation  wage  a  destructive  warfare 
against  any  one  of  its  competitors  without  involving  all  of  them  ? 

A.    No  ;  I  would  say  not. 

We  have  referred  above  to  competitive  steel  conditions  on 
the  Atlantic  seaboard  as  shown  by  the  proofs.  Those  proofs 
also  show  how  competition  to  the  Cambria,  Jones  &  Laughlin 
and  the  Steel  Corporation  has  grown  on  the  Pacific  Coast. 
This  competition  has  increased  since  the  Steel  Corporation  was 
formed.  Mr.  Pigott  testifies  his  company  has  built  at  San 
Francisco  open  hearth  furnaces  with  a  capacity  of  30,000  tons ; 


COMBINATION    IN   THE    STEEL    INDUSTRY  in 

bar  mills,  with  30,000  tons  capacity ;  and  at  Seattle**  rail  re- 
rolling  mill  with  a  capacity  of  30,000  tons.  For  its  basic  supply 
this  company  is  wholly  independent  of  the  Steel  Company, 
Jones  &  Laughlin,  the  Cambria  Steel  and  all  eastern  companies 
doing  business  on  the  Pacific  Coast.  This  is  clearly  shown  by 
the  proofs.  This  company  gets  one  half  of  its  pig  iron  from 
China  and  the  balance  from  the  Republic  company  and  the 
Tennessee  Coal  &  Iron  Company.  The  proof  is  that  the 
freight  paid  to  deliver  the  Tennessee  company  pig  iron  from 
Birmingham,  Ala.,  to  San  Francisco  is  $  10.08  per  ton.  The 
proofs  further  show  that  the  Chinese  pig  iron  is  delivered  at 
Pacific  points  at  a  freight  rate  of  $  3.70  per  ton.  If  to  this 
$3.70  be  added  the  price  of  the  pig  iron,  $6.20  per  ton,  it 
will  be  seen  that  the  Chinese  pig  iron  at  $6.20,  plus  freight 
$3.70,  $9.90,  can  be  paid  for  and  delivered  on  the  Pacific  Coast 
for  about  the  amount,  $  10.08,  the  Republic  and  the  Tennessee 
Company  pay  for  freight  alone.  As  the  proofs  further  show 
that  pig  iron  from  India  is  being  delivered  in  San  Francisco 
from  Calcutta  at  an  expense  of  $  12.38  per  ton,  namely,  price  of 
pig  iron  $  5.40  plus  freight  $6.98,  it  will  be  seen  that  the  future 
basic  supply  of  this  and  other  companies  that  may  spring  up 
on  the  Pacific  Coast  can  be  had  of  Asiatic  pig  metal  wholly 
independent  of  the  Steel  Corporation  and  other  eastern  com- 
petitors. In  view  of  the  further  proof  that  the  ores  on  the 
western  coast  of  Mexico,  and  necessarily  those  of  Chili,  are  also 
available,  and  that  the  improved  practice  in  steel  making  makes 
ores  now  usable  which  were  formerly  not  so,  the  conclusion  is 
warranted  that  the  field  for  all  possible  development  on  the 
Pacific  Coast  in  the  steel  business  is  wholly  free  from  any 
monopolistic  control  whatever.  It  will  thus  be  seen  that  a  sub- 
stantial steel  industry  in  rails,  bars,  and  open  hearth  steel  has 
in  fact  grown  up  on  the  Pacific  Coast,  while  in  competition 
with  the  Steel  Company,  a  competition  which  Mr.  Pigott  de- 
scribes, "  from  the  standpoint  both  of  a  customer  and  a  com- 
petitor," "  has  been  beneficial." 

Later,  we  shall  note  the  testimony  of  competitors  as  to  their 
relation  to  the  Steel  Corporation,  but  before  referring  to  indi- 
vidual relations,  we  deem  it  proper  to  here  refer  to  some  general 


112  TRUSTS,   POOLS  AND   CORPORATIONS 

phases  of  monopoly  which  affect  all  competitors.  One  of  these 
was  the  practice  by  large  companies  of  exacting  freight  rebates 
from  railroads  under  threat  of  diverting  shipments  elsewhere. 
These  practices  were  common  up  to  the  time  of  the  ending  of 
the  old  era  of  freights  unregulated  by  the  government. 

On  January  28,  1905,  Congress  directed  the  Secretary  of 
Commerce  and  Labor  to  investigate  the  steel  and  iron  industry 
of  the  country  with  a  view  to  ascertaining  to  what  extent  the 
United  States  Steel  Corporation  controlled  the  output  and  prices 
of  finished  product  made  by  independent  companies  dependent 
upon  it  for  their  raw  material  and  to  report  any  restraints  by  it 
of  commerce,  foreign  or  domestic.  James  R.  Garfield,  who  as 
Secretary  of  Commerce  and  Labor,  made  this  examination, 
was  called  as  a  witness.  He  testifies  he  had  made  an  investiga- 
tion and  examination  of  the  railways  in  a  similar  manner  to  that 
made  in  the  Standard  Oil,  and  found  no  rebating  whatever  by 
the  railroads  to  the  Steel  Corporation.  That  he  was  justified  in 
his  conclusion  is  strengthened  by  the  fact  that  at  a  meeting  of 
the  Steel  Corporation's  executive  committee  in  1901,  called 
to  consider  the  policy  of  the  company  towards  railroads,  the 
minutes  show  the  position  taken  the  first  year  of  the  corpora- 
tion's formation  by  its  chairman  and  there  recorded,  was  "  that 
we  cannot  afford  to  take  the  position  of  asking  any  railroad, 
directly  or  indirectly,  to  discriminate  in  our  favor."  This  policy 
was  later  emphasized  in  a  letter  sent  to  the  presidents  of  the 
railroads  handling  the  Steel  Corporation's  freight,  as  follows : 

Personal  I  Sept.  20,  1905 

Dear  Sir  :  As  you  know,  this  corporation  long  since  adopted  the 
unalterable  policy  of  recommending  to  subsidiary  companies  in  which 
it  is  interested,  that  under  no  circumstances  should  rebates  be 
solicited  or  received  contrary  to  law.  This  policy  will  be  strictly 
adhered  to  and  it  is  hoped  and  expected  your  subordinates  will  be 
advised  and  instructed  accordingly.  If  any  one  should  at  any  time 
violate  his  instructions  in  this  respect,  notice  of  the  same  should  be 
promptly  given  to  the  president  of  the  subsidiary  company  interested 
and  also  to  the  undersigned. 

Yours  very  truly, 

VV.  E.  Corey,  President 


COMBINATION    IN   THE   STEEL   INDUSTRY  1 13 

In  view  of  this  announced  policy  of  the  corporatiefi  of  the 
investigation  made  by  the  Department  of  Commerce  and  Labor, 
of  the  absence  of  any  complaints  by  any  competitor,  and  of  no 
proof  of  any  freight  rebate  being  given,  we  are  justified  in  coii- 
cluding  that  the  Steel  Corporation  has  not  used,  or  sought  to 
use,  freight  rebates  as  a  means  of  undermining  its  competitors, 
or  of  monopolizing  business. 

We  next  turn  to  ruinous  trade  wars  against  competitors 
which,  as  we  have  seen,  was  one  of  the  features  of  attempted 
monopoly  denounced  by  the  Supreme  Court.  In  that  connec- 
tion it  is  to  be  noted  that  under  conditions  incident  to  the  steel 
trade  the  power  of  a  large  steel  company  to  carry  on  a  ruinous 
trade  war  against  any  particular  competitor  does  not  exist  in  the 
iron  and  steel  industry.  The  customers  of  the  great  steel  com- 
panies are  large  jobbers  and  the  purchasing  agents  of  other 
companies,  who  are  in  the  closest  touch  with  every  fluctuation 
of  the  steel  market.  The  result  is  that  any  effort  on  the  part  of 
any  one  of  these  great  steel  companies  to  inaugurate  a  trade 
war  by  ruinously  underselling  a  competitor  would  at  once,  owing 
to  the  sensitiveness  and  interrelated  character  of  the  steel  mar- 
ket, result  in  forcing  the  company  that  was  thus  ruinously 
selling  in  any  particular  market  or  locality  to  in  the  same  way 
ruinously  lower  its  prices  in  every  other  community.  In  that 
respect,  the  president  of  the  Youngstown  Sheet  &  Tube 
Company,  a  competitor,  testified  that,  if  the  Steel  Corporation 
attempted  such  a  course,  "  they  would  involve  their  own  market 
to  such  an  extent  that  they  would  suffer  equally  with  us."  The 
testimony  of  the  president  of  the  Cambria  Steel  Company, 
already  quoted,  is  to  the  same  effect,  as  well  as  that  of  the 
president  of  the  Republic  Iron  and  Steel  Company.  And  the 
practical  impossibility  of  such  a  course  is  shown  by  Judge  Gary, 
where  he  testifies : 

I  feel  certain  that  by  reason  of  our  integrated  proposition  we  had 
the  advantage  in  cost  of  production  over  our  competitors  generally. 
If  any  one  having  advantage  in  any  business  is  willing  to  sell  down 
to  his  cost  price,  of  course  he  would  live  while  his  competitors  would 
starve  ;  but  that  is  a  most  unnatural  position  for  any  producer  to  take 
and  long  continue. 


114  TRUSTS,    POOLS  AND   CORPORATIONS 

In  view,  therefore,  of  the  uncontradicted  proof  of  those  famil- 
iar with  the  steel  business  that  no  such  ruinous  trade  war  could 
with  profit  to  itself  be  carried  on  by  the  Steel  Company  against 
a  competitor,  and  in  the  absence  of  proof  of  any  effort  by  it  to 
harass  them  by  such  conduct,  we  are  warranted  in  concluding 
there  has  been  no  attempt  by  the  Steel  Corporation  to  monop- 
olize or  restrain  trade  through  ruinous  trade  wars  against  its 
competitors.  For  of  the  conduct  of  the  Steel  Corporation,  the 
views  of  its  competitors  is  the  best  gauge.  Monopoly  and  un- 
reasonable restraint  of  trade  are,  after  all,  not  questions  of  law, 
but  questions  of  hard-headed  business  rivalry,  and  whether  there 
is  monopoly  of  an  industry,  whether  trade  is  subjected  to  un- 
reasonable restraint,  whether  there  is  unfair  competition,  are 
facts  about  which  business  competitors  best  know  and  are  best 
qualified  to  speak.  And  it  may  be  accepted  as  a  fact  that 
where  no  competitor  complains,  and  much  more  so,  where  they 
unite  in  testifying  that  the  business  conduct  of  the  Steel  Corpora- 
tion has  been  fair,  we  can  rest  assured  there  has  been  neither 
monopoly  nor  restraint.  Indeed,  the  significant  fact  should  be 
noted  that  no  such  testimony  of  acts  of  oppression  is  found 
in  this  record  as  was  given  by  the  competitors  of  the  Tobacco 
or  Standard  companies  in  the  suits  against  those  companies. 
We  have  carefully  examined  all  the  evidence  given  by  competi- 
tors of  the  Steel  Corporation.  We  have  read  the  testimony 
of  customers  who  purchased  both  from  it  and  from  its  competi- 
tors. Its  length  precludes  its  recital  here,  but  we  may  say  its 
volume,  the  wide  range  of  location  from  which  such  witnesses 
came,  and  their  evidently  substantial  character  in  their  several 
communities  make  an  inevitable  conclusion  that  the  field  of 
business  enterprise  in  the  steel  business  is  as  open  to,  and  is 
being  as  fully  filled  by  the  competitors  of  the  Steel  Corpora- 
tion as  it  is  by  that  company. 

We  have  noted  above  the  remarkable  growth  of  the  Youngs- 
town  Sheet  &  Tube  Company,  which  came  into  existence  in 
1905,  and  in  the  meantime  has  grown  to  be  a  very  important 
competitor  of  the  Steel  Company.  The  testimony  of  James  A. 
Campbell,  its  present  president,  who  was  called  as  a  witness 
by  the  government,  so  fully  covers  the  subject  of  the  attitude 


COMBINATION    IN   THE   STEEL   INDUSTRY  115 

of  the  corporation  toward  its  competitors  and  the^^urchasing 
public  that  we  quote  it  at  length  : 

A.  My  experience  is  that  it  is  the  best  competition  we  have  ;  that 
they  are  open  and  above  board  in  all  of  their  dealings.  Their  prices 
are  either  published,  or  we  get  direct  information  from  them  or 
through  our  customers  as  to  what  their  price  is,  and  we  find  that  their 
price  is  practically  the  same  to  everybody.  With  other  competition 
that  we  have,  with  the  independents,  for  instance,  the  independents 
vary  more  in  their  prices,  and  we  never  quite  know  what  their  price  is. 
It  may  be  one  thing  to-day  and  another  to-morrow,  and  they  do  not  con- 
duct their  business  in  the  same  way,  because  it  is  a  smaller  business 
and  more  of  an  individual  business  ;  and  they  will  make  prices  accord- 
ing to  the  class  of  material  pretty  largely  and  the  class  of  orders. 
So  we  were  not  as  capable  of  gauging  how  they  are  conducting 
their  business  as  we  are  in  regard  to  the  subsidiary  companies  of  the 
Steel  Corporation. 

Q.  Is  your  competition  with  these  subsidiary  companies  of  the 
United  States  Steel  Corporation  active  and  energetic  and  vigorous 
competition  ? 

A.  It  is  —  very,  at  times.  We  sell  to  many  of  the  same  people 
that  they  do,  the  same  class  of  material. 

Q.  Have  you  ever  known  of  their  having  made  low  prices  in  a 
limited  section  of  the  country  for  the  sake  of  attempting  to  put  a 
competitor  out  of  business  ? 

A.    I  think  not.     I  do  not  recall  any  time,  with  any  company. 

Q.  Have  they,  in  your  experience,  been  guilty  of  any  unfair 
methods  to  suppress  competition  ? 

A.  I  think  in  the  early  days  —  I  did  think  in  the  first  two  or  three 
years  we  were  in  business  that  there  were  some  things  done,  and  I 
think  done  without  the  knowledge  of  the  higher  officials,  that  were  un- 
fair ;  but  those  disappeared  promptly,  and  there  has  been  nothing  of 
that  kind,  nothing  but  the  fairest  competition  in  every  respect  for  the 
last  seven  or  eight  years. 

Q.  When  the  market  has  been  falling,  what  has  been  your  experi- 
ence as  to  the  prices  which  they  have  maintained  as  compared  with 
those  of  the  independents  ? 

A.  In  depressed  times,  when  there  is  not  nearly  enough  business 
to  keep  all  of  the  mills  operating  to  their  full  capacity,  their  prices  are 
usually  higher  than  the  independents.  In  good  times,  when  the  mills 
are  all  working  to  capacity,  their  prices  are  usually  lower  than  the 
independents.     The  independents  will  accept  bonuses  and  do  things 


Ii6  TRUSTS,    POOLS   AND    CORPORATIONS 

of  that  kind  that  I  do  not  think  the  corporation  will  do.  So  that  I 
think  the  general  effect  is  for  the  steadying  of  prices  and  making 
them  better  for  the  country  at  large,  and  of  course  in  dull  times,  it  is 
a  great  protection  to  the  smaller  manufacturers  to  have  them  keep 
their  prices  up,  when  business  is  slack,  than  it  would  be  if  they  went 
out  like  the  Carnegie  Steel  Company  did  in  the  early  days  and  took 
all  the  business  and  shut  the  other  people  down. 

We  next  turn  to  that  most  injurious  feature  of  monopoly's 
wrong  to  the  public,  to  wit,  increase  in  the  price  of  its  product 
or  a  deterioration  in  quality.  Turning,  first,  to  the  basic  ques- 
tion of  quality,  no  dispute  arises  under  the  proofs.  They  are 
simply  uniform  that  both  with  independents  and  the  Steel 
Corporation,  there  has  been  a  steady  bettering  of  quality  in 
steel  products.  This  factor  of  improving  its  product  has  been 
recognized  by  the  Steel  Corporation,  and  a  study  of  the  testi- 
mony of  its  buyers  satisfies  us  that  this  progressive  growth  in 
quality  by  the  Steel  Corporation  has  been  the  principal  means 
by  which  it  has  acquired  and  held  its  business. 

Turning  next  to  the  increase  in  price,  we  are  met  by  two 
aspects  of  the  case.  Two  learned  experts  have  been  called,  one 
by  the  government,  and  one  by  the  Steel  Corporation,  who  draw 
different  conclusions  as  to  w^hether  there  was  an  increase  or 
decrease  in  the  price  of  iron  and  steel  products.  The  deduc- 
tions of  both  are  supported  by  weighty  contentions  and  numer- 
ous enlightening  charts.  The  able  reasoning  of  both  has  had 
the  thoughtful  consideration  the  standing  of  the  two  men  chal- 
lenges. We  may  note  that  the  different  ranges  of  time  they  had 
taken,  as  the  basis  of  their  reasoning,  really  makes  them  reason 
about  two  different  things,  but  apart  from  that,  we  think  what- 
ever may  have  been  the  range  of  iron  and  steel  prices  during 
the  periods  of  consideration  selected  by  each,  the  proof  is  that 
in  these  days  of  quick  communication  the  general  price  of  steel 
and  iron  products  cannot  be  localized,  but  is  interdependent  in 
this  country  and,  indeed,  internationally  so.  That  proof  is  that 
when  there  is  an  oversupply,  even  in  the  European  steel  and 
iron  market,  that  market  tends  to  unload  on  the  American  steel 
market,  and  on  the  other  hand,  when  there  is  an  oversupply 
here,  this  country  seeks  to  dump  on  their  markets  at  any  price. 


COMBINATION    IN   THE   STEEL   INDUSTRY  ii? 

It  will  also  be  observed  that  so  sensitive  and  interrelated  is  the 
price  of  steel  and  iron  that  a  drop  in  price  of  anj^'jDarticular 
branch  of  steel  leads  to  a  drop  in  all  other  branches. 

No  evidence  is  produced  showing  that  there  has  been  at  any 
time  an  arbitrary  or  unreasonable  increase  in  price  of  any  of 
the  numerous  products  of  the  Steel  Corporation.  On  the  con- 
trary, the  proofs  show  decreases  in  important  steel  products, 
among  which  we  may  refer  to  wire  nails  which  from  selling  in 
1 90 1  at  $$1,  when  the  Steel  Corporation  was  formed,  were,  in 
191 1,  when  this  petition  was  filed,  selling  at  ^36.  During  the 
same  time,  steel  bars  receded  in  price  from  1^33  to  $2$.  Steel 
beams  dropped  from  $36  to  $27;  billets  from  ^27  to  ^24;  and 
a  statement  taken  from  the  Steel  Corporation's  accounts  shows 
there  was  between  1904  —  a  date  when  the  Steel  Corporation 
may  be  said  to  have  been  fairly  systematized  and  under  way  — 
and  191 2,  a  decrease  in  fabricated  prices  received  by  the  com- 
pany of  19  per  cent,  and  of  all  other  products,  of  1 1  per  cent. 
Summing  up  the  business  result,  the  president  of  the  corpora- 
tion testified  the  Steel  Corporation  was  in  191 2  getting  about 
$8  a.  ton  less  for  materials  in  the  domestic  market  than  they 
were  receiving  in  1904.  Moreover,  it  should  not  be  overlooked 
that  during  these  years  there  were  substantial  factors  of  in- 
creased expense  in  the  cost  of  manufacture.  The  freight  on 
coke,  of  which  the  corporation  uses  some  forty  thousand  tons 
a  day,  has  increased  12  per  cent  since  1901  ;  the  freight  on 
limestone,  which  constitutes  one  third  of  a  furnace's  burden, 
has  increased  10  per  cent  since  1901  ;  and  iron  and  steel  wages 
have  increased  282  per  cent. 

Standing  aside  for  later  discussion  the  matter  of  the  Gary 
dinners  and  the  meetings  following  them,  through  which  it  is 
alleged  the  Steel  Corporation  in  cooperation  with  its  competi- 
tors unduly  restrained  and  obstructed  the  normal  course  of  the 
steel  trade,  and  confining  ourselves  to  the  fixation  or  control  of 
prices  by  the  Steel  Corporation  itself,  or  its  subsidiaries,  we 
may  say  we  have  found  in  this  record  no  proof  by  any  witness 
showing  any  instance  in  which  the  Steel  Corporation  or  its  sub- 
sidiary companies  has  set  either  an  arbitrary,  exorbitant,  unfair, 
or  controlling  price  on  any  one  of  its  numerous  products.     It  is 


Il8  TRUSTS,    POOLS   AND    CORPORATIONS 

a  mere  truism  to  say  that  the  fixing  and  maintaining  by  a  manu- 
facturer of  a  fair  price  above  cost  is  not  only  a  right  but  a 
commercial  necessity,  and  any  other  course  must  end  in  his 
bankruptcy.  When  such  fair  prices  are  departed  from  and 
they  are  unreasonably  raised  and  exacted  from  the  purchasing 
public,  the  public  is  prejudiced  thereby.  On  the  other  hand, 
when  that  price  is  so  unreasonably  lowered  as  to  drive  others 
out  of  business,  with  a  view  of  stifling  competition,  not  only  is 
that  wronged  competitor  individually  injured,  but  the  public  is 
prejudiced  by  the  stifling  of  competition.  Between  these  two 
price  extremes,  there  must,  in  the  nature  of  things,  be  a  consid- 
erable zone  of  reasonable  price  variation,  and  what  is  a  fair 
price  is  a  question  which  can  only  be  determined  by  a  careful 
ascertainment  from  cost  sheets  and  other  data  of  such  fair 
price.  In  the  present  case  neither  side  has  furnished  this  court 
with  proof  from  which  we  could  intelligently  determine  whether 
the  prices  charged  by  the  Steel  Corporation  for  any  of  the 
numerous  articles  here  involved,  beginning  for  example  with 
pig  iron  and  ending  with  rails,  were  unfair,  exorbitant,  or  un- 
reasonable. In  the  absence  of  such  testimony,  it  is  manifest 
that  for  this  court  to  assume  that  the  prices  at  which  any  of 
these  articles  were  sold  by  the  Steel  Corporation  and  its  com- 
petitors were  unfair  would  be  to  base  such  conclusion  on  sur- 
mise instead  of  proof.  But  there  is  not  only  this  absence  of 
testimony  in  regard  to  the  prices  received  being  unfair  and  ex- 
orbitant, but  there  is,  on  the  other  hand,  affirmative  testimony, 
which  we  cannot  disregard,  and  which,  as  it  seems  to  us,  con- 
strains us  to  conclude  that  the  prices  of  the  product  sold  by  the 
Steel  Corporation  have  been  the  result  of  the  joint  action  of  the 
law  of  supply  and  demand  and  of  that  vigorous  rivalry  which 
has  at  all  times  existed  between  the  Steel  Corporation  and  its 
competitors.  In  that  respect  we  have  the  testimony  of  the 
Steel  Corporation's  great  competitors,  of  large  and  small  manu- 
facturers, over  the  whole  country  who  purchased  basic  steel 
products  and  put  them  through  other  stages  in  their  mills  and 
factories ;  of  jobbers  and  warehousemen  who  buy  and  hold  for 
sale  large  stocks  of  steel  products.  The  testimony  of  these 
men  —  and  there  is  no  testimony  to  the  contrary  —  is  that  the 


COMBINATION    IN   THE   STEEL   INDUSTRY  119 

iron  and  steel  trade  in  the  various  products  of  the  Stgel  Corpo- 
ration is  and  has  been  open,  competitive,  and  uncontrolled,  and 
that  all  engaged  therein  have  free  will  control  in  selling  at  their 
own  prices.  This  important  fact  we  shall  not  leave  to  here 
stand  as  a  statement  of  a  conclusion  reached  by  us  from  a 
study  of  the  testimony ;  but,  at  the  risk  of  unduly  prolonging 
this  opinion,  we  shall  here  spread  on  record  the  testimony  of  a 
few  witnesses  on  that  subject  so  that  he  who  runs  may  read. 

In  taking  up  that  question,  we  have,  in  the  first  place,  the 
proof  that  so  far  as  the  prices  charged  by  the  Steel  Company 
are  concerned  its  practice  has  uniformly  been  to  give  the  ut- 
most publicity  to  such  prices.  In  that  regard,  Charles  H. 
Schwab,  a  former  president,  testified  as  already  noted  above : 

In  the  beginning  of  the  Steel  Corporation,  during  my  presidency, 
the  policy  of  the  corporation  (was)  ...  of  naming  a  price  for  our 
product  not  only  to  our  customers,  but  openly  through  the  trade  jour- 
nals, if  you  will,  because  I  used  to  give  it  to  the  Iron  Age  and  the 
Iro7i  Trade  Review  each  week,  and  the  sticking  to  these  prices 
throughout  the  trade  ;  there  probably  were  exceptions  of  a  minor  char- 
acter to  very  large  consumers,  but  as  a  rule,  during  my  presidency  of 
the  corporation,  the  prices  of  its  product  were  fixed  and  published 
and  they  were  what  were  charged  the  customers.  ...  So  far  as  I 
know,  from  the  point  of  view  of  a  competitor  (the  witness  is  now 
president  of  the  Bethlehem  Steel  Company)  they  have  adopted  since 
that  time  practically  the  same  policy. 

The  testimony  of  the  sales  manager  of  the  La  Belle  Iron 
Works  of  Wheeling,  W.  Va.,  may  be  taken  as  typical  of  the 
existence  of  an  open  steel  market  in  competition  with  the  Steel 
Corporation.  That  company  had,  during  the  ten  years  follow- 
ing the  organization  of  the  Steel  Corporation,  increased  its 
finished  product  of  billets,  sheet  bars,  nails,  tubes,  plates,  skelp, 
and  sheets  largely  over  400  per  cent,  and  its  market  covered  the 
entire  country,  Mexico  and  Canada.  Its  sales  manager  said 
that  their  competitors  are  all  the  leading  steel  companies,  pretty 
near,  take  the  Lackawanna,  Cambria,  Republic,  the  Youngs- 
town  Sheet  &  Tube,  the  Wheeling  Steel  &  Iron  and  the 
various  constituents  of  the  Steel  Corporation.  The  prices 
which    they  obtain    for   their    steel  products    are  not    fixed    in 


I20  TRUSTS,    POOLS   AND   CORPORATIONS 

agreement  with  their  competitors.  That  is  true  of  each  and 
every  year  of  the  ten  years  that  he  had  been  general  manager 
of  sales.  It  is  true  of  each  and  every  article  they  have  pro- 
duced and  sold  in  the  market.  There  has  been  no  time  during 
the  ten  years  when  the  price  of  any  article  they  have  produced 
and  sold  has  been  fixed  by  agreement  with  any  competitor. 
He  is  able  to  say  that  because  the  chances  are  that  if  it  had 
been  done  in  his  company  he  would  have  known  it.  That  is 
his  business.  The  prices  have  sometimes  been  fixed  in  a  gen- 
eral way  in  consultation  with  their  president.  No  price  has  ever 
been  suggested  by  the  president  or  anybody  else  in  any  of  these 
conferences,  as  a  price  agreed  upon  by  aiiy  competitor.  The  con- 
siderations that  controlled  him  in  these  conferences,  or  when 
he  acted  independently  of  them  in  fixing  prices,  were  competi- 
tive conditions  and  cost  of  manufacture.  The  state  of  their 
order  book  affects  the  question  of  prices.  When  the  order 
book  is  lean,  they  probably  make  lower  prices.  When  full  of 
orders,  the  chances  are  they  will  advance  prices.  That  is  al- 
ways the  case.  It  is  observable  that  competition  is  keener  and 
competitors  more  active  when  times  are  dull  and  order  books 
are  lean.  Prices  usually  rule  higher  when  business  is  active, 
and  when  business  is  dull  they  rule  lower.  The  prices  obtained 
by  them  have  fluctuated.  He  would  say  the  prices  obtained  by 
their  competitors  have  fluctuated.  The  trade  or  competition  in 
these  various  articles  manufactured  has  been  nearly  always 
active  during  the  period  he  has  had  charge  of  the  sales.  The 
competition  has  been  what  you  would  term  keen.  They  met 
three  or  four  or  more  competitors  in  every  article  they  manu- 
facture. The  competitors  are  numerous.  They  have  grown 
in  numbers  and  output. 

The  testimony  of  the  chairman  of  the  Republic  Iron  &  Steel 
shows  how  that  large  company  arrives  at  its  prices ;  they  do  not 
have  uniform  prices.  They  sell  to  some  customers  at  one  price 
and  to  other  customers  at  another,  varying  with  the  size  of  the 
order,  the  quality  and  the  character  of  the  service  they  are  ex- 
pected to  render  naturally.  They  have  traveling  men  and  their 
own  branch  sales  offices.  As  a  general  rule,  they  send  out  to 
them  prices  at  various  times   at  which  they  are  to  sell  their 


COMBINATION    IN    THE   STEEL   INDUSTRY  I2I 

various  products.  They  give  minimum  prices  below  _xbich  they 
shall  not  go,  and  allow  them  to  use  their  intelligence  in  getting 
all  above  they  can.  That  minimum  would  naturally  be  the 
same  for  all  of  them.  Generally  speaking,  it  would  be  the 
same  based  on  cost.  They  give  them  the  same  latitude;  in 
other  words,  the  same  general  base,  which  represents  a  mini- 
mum below  which  they  must  not  go  as  it  might  involve  a  loss. 

As  to  the  Jones  &  Laughlin  competition,  the  testimony  of  the 
man  in  charge  of  the  sales  is  that  Jones  &  Laughlin  make  steel 
billets,  slabs  and  blooms,  and  convert  these  into  finished  prod- 
ucts, principally  structural  material,  plates,  bars,  shafting, 
chains,  spikes,  wire,  wire  nails,  tin  plate  and  black  sheets  in  tin 
mill  sizes.  These  different  products  that  they  have  are  sold  in 
competition  with  other  makers  of  similar  products.  The  competi- 
tion is  unhraited.  He  means  unlimited  by  agreements  as  to 
prices.  That  is  true  of  everything  he  has  mentioned.  He  says 
that  this  has  been  so  to  his  knowledge  for  aboict  nine  years.  The 
competition  has  been  keen.  It  extends  to  competition  in  the 
matter  of  prices. 

Turning  from  fellow  competitive  makers  of  the  same  general 
products  as  the  Steel  Corporation,  we  naturally  turn  to  the  testi- 
mony of  millowners  who  use  as  their  basic  supplies  the  products 
made  by  these  large  companies  and  inquire  whether,  as  buyers, 
they  have  found  any  price  fixation  by  these  basic  manufacturers. 
As  a  type  of  that  character,  we  note  the  testimony  of  the  presi- 
dent of  such  a  company  who,  in  substance,  says : 

I  should  say  we  were  using  about  25,000  to  30,000  tons  a  year  in 
1901.  It  has  been  growing  each  year.  I  think  last  year  we  pur- 
chased something  in  the  neighborhood  of  100,000  tons.  I  know  of  no 
other  single  customer  for  bar  mill  products  in  the  United  States  that 
buys  as  much  as  100,000  tons.  We  buy  from  the  Carnegie  Steel,  the 
Cambria  Steel,  the  Republic  Iron  &  Steel,  the  Youngstown  Sheet 
&  Tube,  and  others.  We  have  always  found  competition  for  our 
purchases  of  bars.  Very  keen  most  generally.  Of  course,  there  are 
times  in  normal  business  when  it  is  not  so  keen,  times  when  the  con- 
sumers of  bars  are  competing  to  get  them.  We  can  generally  pur- 
chase at  a  less  price  than  the  quotation.  That  is,  the  quotations 
published  in  the  Iron  Age  or  the  Iron   Trade  Review.     I  have  never 


122  TRUSTS,   POOLS  AND   CORPORATIONS 

observed  any  indication  of  a  combination  or-  agreement  a?nong  bar 
makers  to  fix  prices.  We  have  always  been  able  to  buy  on  fair 
competition.  I  think  we  have  always  been  able  to  get  the  benefit 
of  fair  competition. 

We  have  carefully  and  patiently  studied  the  voluminous  testi- 
mony varying  on  the  general  course  of  all  branches  of  the  steel 
trade  covering  the  whole  time  the  Steel  Corporation  has  been 
engaged  in  such  trade.  The  testimony,  as  noted  above,  runs 
from  volume  i8  to  volume  28,  inclusive.  It  covers  proofs  by  its 
manufacturing  competitors  in  all  branches,  and  also  the  differ- 
ent classes  of  customers  whose  trade  it  and  its  fellow  competitors 
seek.  It  is  apparent  that  among  this  latter  class  (that  is,  the 
consumers  of  its  products)  we  would  naturally  find  evidence  of 
any  throttling  of  competition,  of  any  undue  restraint  of  the 
steel  trade.  The  typical  extracts  we  have  made  above  from 
varied  sorts  of  buyers,  of  varied  sorts  of  products,  cover  wide 
ranges  of  consumers.  No  one  can  read  these  volumes  of  testi- 
mony and  fail  to  be  satisfied  that  this  great  body  of  business 
men,  scattered  over  all  parts  of  the  country,  in  keen  competition 
with  each  other  in  their  several  lines,  is  alert  in  seeing  that 
competitive  conditions  exist  between  the  manufacturers  of  basic 
steel  products  from  whom  they  buy.  And  the  sworn  testimony 
of  these  men,  who  are  vitally  interested  in  the  maintenance  of 
real  competition  between  the  Steel  Corporation  and  its  manu- 
facturing competitors,  that  such  real  competition  does  exist  and 
has  existed  during  the  past  ten  years,  cannot  but  carry  a  convic- 
tion that  such  is  the  case.  A  study  of  the  testimony  of  these 
men,  who  are  close  to  and  vitally  interested  observers  of  the 
prices  of  these  products,  shows  that  a  single  large  concern,  by 
lowering  the  price  of  any  substantial  steel  product  it  sells,  can 
depress  the  obtainable  price.  It  further  shows  that  the  converse 
is  the  case  —  that  no  single  large  concern,  by  raising  or  even 
maintaining  the  price  of  any  substantial  steel  product,  can  raise 
the  obtainable  price.  It  further  shows  that  the  prices  at  which 
actual  sales  were  made  during  this  time  in  the  steel  trade 
depend  on  whether  the  consumption  of  steel  was  such  that  the 
mills  were  crowded  with  orders  from  buyers,  or  whether  buyers 


COMBINATION    IN   THE   STEEL   INDUSTRY  123 

were  crowded  with  offers  from  mills.  In  other  words,  if  the 
mills  were  crowded  with  orders,  there  was  an  increase  of  com- 
petition between  buyers  and  a  corresponding  decrease  in  com- 
petition between  manufacturers.  On  the  other  hand,  if  the 
mills  were  lacking  in  orders,  then  there  was  a  keen  competition 
between  mill  men  to  get  orders  and  corresponding  decrease  in 
competition  among  buyers  to  give  them.  The  proofs  further 
show  that,  when  there  is  an  increase  of  orders  and  a  stiffening 
of  prices,  steel  buyers  are  apt  to  buy  at  once,  and  this  tends  to 
further  increase  the  price,  but,  on  the  other  hand,  buyers  are 
not  apt  to  buy  at  once  when  the  price  grows  less,  but  wait  until 
the  bottom  is  reached,  and  this  withholding  of  orders  tends  to 
accentuate  the  fall  of  prices.  The  proofs  further  show  that  in 
normal  times,  when  ability  to  fill  orders  and  ability  to  get  orders 
are  in  fair  balance,  prices  vary  but  little,  but,  as  soon  as  that 
balance  is  disturbed,  the  tendency  of  prices  up  or  down  becomes 
accentuated,  and  increased  competition  follows  between  the 
mills,  if  prices  go  down,  between  buyers,  if  they  go  up.  The 
study  of  these  proofs,  given  by  both  mill  owners  and  buyers  of 
their  product,  satisfies  us  that  this  has  been  and  is  the  course 
of  the  steel  trade,  and  we  are  therefore  justified  from  the  proofs 
in  concluding  that  the  prices  at  which  steel  products  have  been 
bought  from  the  Steel  Company  and  its  competitors  have  been 
fixed  by  business  conditions  —  overdemand  or  oversupply.  The 
proofs  also  show  the  same  conditions  and  results  prevail  in  the 
European  steel  market. 

Assuming,  then,  that  the  iron  and  steel  trade  in  the  United 
States  is  and  has  been  during  the  time  here  in  question  flowing 
in  the  natural  and  normal  channel  of  demand  and  supply  and 
of  genuine  competition,  we  next  inquire  as  to  what  course  the 
proofs  show  the  Steel  Company  pursues  in  reference  to  such 
trade ;  in  other  words,  is  its  course  one  of  monopoly  or  in 
restraint  of  trade  ?  Let  us  first  ascertain  what  the  practice  of 
the  Steel  Corporation  actually  was  and  is  as  to  prices.  Whether 
that  course  be  right  or  wrong,  whether  it  be  in  violation  of  the 
letter  or  spirit  of  the  Sherman  Law,  there  can  be  no  uncertainty 
in  three  things  :  First,  what  its  policy  is ;  of  its  having  been 
openly  and   publicly   avowed;    and,  lastly,  of   its  having   been 


124  TRUSTS,    POOLS   AND   CORPORATIONS 

followed.     Its  avowed  general  practice  in  regard   to   prices  is 
thus  summarized  by  its  chairman,  Judge  Gary,  who  says: 

The  United  States  Steel  Corporation  has  endeavored,  so  far  as  it 
could,  to  prevent  the  unreasonable  increase  of  prices.  It  has  been  a 
decided  factor  from  time  to  time  in  keeping  prices  down  to  a  level 
which  was  believed  to  be  fair  and  just.  Prices  generally  are  con- 
trolled very  much  by  the  business  conditions  of  the  country.  The 
ordinary  laws  of  trade  and  supply  and  demand  fix  the  general  prices 
of  commodities,  but  the  Steel  Corporation  has  endeavored  to  prevent 
sudden  and  violent  fluctuations  downward  by  its  advice,  but  more 
particularly  by  its  own  action  in  fixing  its  prices,  and  has  endeavored 
to  prevent  the  unreasonable  increase  in  prices  at  times  when  the 
demand  was  greater  than  the  supply  and  there  was  a  general  disposi- 
tion in  the  trade  to  take  advantage  of  these  conditions  and  unduly 
increase  prices. 

That  it  has  followed  this  policy  is  the  testimony  of  both  its 
competitors  and  customers. 

The  fact  of  such  policy  and  the  reasons  for  it  are  thus  sum- 
marized by  Charles  M.  Schwab  : 

While  I  was  president  of  the  Steel  Corporation,  I  should  say  that 
our  prices  as  a  rule  were  somewhat  above  the  other  prices  in  depressed 
times  and  below  the  other  prices  in  prosperous  times.  In  other  words, 
we  endeavored  to  keep  more  uniform.  .  .  .  The  theory  was  that  many 
smaller  dealers  bought  their  steel  from  this  corporation ;  that  we  did 
not  want  them  to  be  speculators,  nor  did  they  want  to  be  speculators, 
as  it  were,  in  the  price  of  steel ;  that  as  a  rule  they  were  caught  with 
big  stocks  w'hen  prices  were  high,  and  made  hea\'y  losses  by  reason  of 
rapid  reductions  and  the  inclination  to  overbuy  when  prices  were  low ; 
and,  if  prices  were  kept  nearly  uniform,  people  buying  steel  would 
buy  for  their  requirements  and  not  speculatively. 

The  proofs  also  show  that  this  policy,  which  is  also  followed 
by  other  large  steel  manufacturers,  largely  resulted  in  doing 
away  with  what  are  called  delivery  premiums;  that  is,  of  post- 
poning deliveries  of  orders  already  taken  at  lower  prices  and 
giving  the  preference  to  orders  taken  later  at  higher  prices, 
which  higher  prices  were  in  effect  obtained  under  the  guise  of 
so-called  delivery  premiums.  The  proofs  likewise  show  that  the 
lessening  of  extremes  in  the  prices  of  basic  steel  products  greatly 


COMBINATION    IN   THE   STEEL   INDUSTRY  125 

benefits  mills  and  factories  that  further  fabricate  slic]]l  articles. 
Thus  one  such  witness  testified  : 

Of  course,  I  am  only  a  small  manufacturer  and  perhaps  to  a  cer- 
tain extent  typical  of  the  average  small  consumer  of  steel  products, 
but  the  conditions  in  the  present  decade  are  far  more  stable  and  far 
more  favorable  to  intelligent  manufacturing  than  they  were  in  the  pre- 
vious period.  Of  course,  the  fluctuations  have  been  less,  and  you  can 
calculate  on  your  road  which  you  have  to  go  over  with  a  good  deal 
more  certainty.  .  .  .  The  sudden  fluctuations,  rising  and  falling  in 
prices,  were  very  unfavorable  to  the  maintenance  of  contracts  or  to 
intelligent  manufacturing.  One  could  not  buy  and  be  sure  that  he 
could  get  out  with  a  profit  on  account  of  the  dips  in  the  market. 

The  proofs  show  that  the  practical  effects  of  this  policy  are 
that  in  prosperous  times  buyers  are  apt  to  buy  from  the  Steel 
Corporation  and  in  depressed  times  from  its  competitors.  What- 
ever the  wisdom  or  unwisdom  of  such  a  policy  may  be,  we  find 
no  proof  tending  to  show  that  it  tends  to  monopolize  the  steel 
business  or  to  unduly  restrain  trade  or  to  prejudice  the  public. 
There  is  no  proof  that  it  in  any  way  interferes  with  the  right  of 
any  other  person  in  the  steel  business  to  fix  his  own  price  on 
his  own  steel  product.  The  proof  shows  that  the  Steel  Corpora- 
tion, in  the  exercise  of  its  own  business  judgment,  has  elected 
to  publicly  announce  its  prices,  to  adhere  to  them  with  all  buy- 
ers alike,  and  to  give  timely  notice  of  its  purpose  to  change 
them.  It  is  neither  the  duty  or  the  province  of  this  court  to 
express  any  opinion  upon  such  policy,  unless  we  are  satisfied, 
as  laid  down  by  the  Supreme  Court,  "  that  it  prejudices  the  pub- 
lic by  unduly  restricting  competition  or  unduly  obstructing  the 
course  of  trade,"  and  of  this  we  have  no  proof.  For,  as  we 
have  seen,  the  testimony  of  those  engaged  in  the  steel  trade  is 
that  this  policy  of  the  Steel  Corporation,  in  refusing  to  raise 
prices,  has  not  restricted  competition  or  obstructed  the  course 
of  trade,  but,  on  the  contrary,  has  tended  to  prevent  prices  from 
rising  to  what  was  aptly  termed  a  "  runaway  market."  And  in 
this  connection  it  is  just  to  note  that  if  the  Steel  Corporation, 
in  refusing  to  advance  its  own  prices,  prevented  other  manu- 
facturers from  advancing  theirs,  it  was  only  exercising  a  veto 
power,  which  every  one  of  many  other  competitors  possessed, 


126  TRUSTS,   POOLS   AND   CORPORATIONS 

and  was  following  a  policy  which  was  also  followed  by  other 
large  competitors  who  were  also  opposed  to  advancing  prices. 
It  is  also  just  to  say  that  in  giving  timely  notice  of  its  purpose 
to  change  them,  and  in  giving  publicity  to  its  prices,  in  adhering 
to  them,  it  will  be  seen  on  reflection  that  the  Steel  Corporation 
has  adopted  a  policy  of  price  publicity  and  adherence,  somewhat 
analogous  to  the  freight  rate  stability  followed  by  the  railroads  un- 
der the  directions  of  the  Interstate  Commerce  Commission,  which 
pubHshed  their  rates  and  only  changed  them  on  notice. 

We  now  turn  to  the  other  phases  of  this  policy,  viz.,  the  cor- 
poration refusing  to  sell  at  lower  prices  when  prices  dropped. 
That  it  did  so,  and  that  by  reason  thereof  it  lost  business,  which 
naturally  went  to  those  who  did  lower  their  prices,  the  proofs 
abundantly  show.  Of  its  right  to  refuse  to  sell  at  lower  prices, 
provided  it  does  not  force  others  to  do  the  same  thing,  there 
can  be  no  question.  This  brings  us  to  the  question :  What  was 
the  policy  of  the  steel  trade  prior  to  1901  under  such  conditions, 
what  was  its  result,  and  what  evils  are  avoided  by  this  change 
of  policy .'' 

In  that  regard,  the  testimony  leaves  no  doubt.  We  take  the 
Carnegie  Steel  Company's  course  in  the  earlier  steel  period  as 
illustrative,  not  only  of  its  policy,  but  as  fairly  typifying  that  of 
its  competitors  as  well.  The  cause  of  falling  steel  prices  is,  of 
course,  that  there  are  not  enough  orders  to  cover  the  production, 
and  this  leaves  two  courses  open  to  the  steel  manufacturer :  He 
must  either  shut  down  his  mill  or  go  after  orders  to  keep  it 
running.  The  policy  of  the  Carnegie  company  (and  in  that  re- 
spect it  was  the  same  as  others)  was  to  try  to  keep  the  mills  go- 
ing, no  matter  what  price  they  got  for  their  product,  or  no  matter 
whether  their  getting  such  orders  meant  the  complete  stoppage 
of  their  competitors'  mills.  Practically  applied,  this  policy  meant 
a  fierce,  ruthless  price-cutting  trade  war,  the  practical  results  of 
which  were  that,  if  these  low  prices  enabled  one  company's 
mills  to  get  the  orders  to  run  its  mills,  the  taking  of  these  orders 
from  other  companies'  mills  and  other  sections  of  the  country  shut 
them  down.  Thus,  in  the  Government  Exhibit  we  find  a  letter 
from  Mr.  Carnegie  to  the  Carnegie  Steel  Company,  embodied 
in  its  minutes,  reciting  such  policy  : 


COMBINATION    IN   THE   STEEL   INDUSTRY  127 

In  the  former  depressions  we  announced  our  policy,  vlz^,  take  all 
orders  going  and  run  full.  Our  competitors  believed  we  meant  what 
we  said,  and  this  no  doubt  operated  to  clear  the  field.  One  after 
another  dropped  out;  finally  Pennsylvania  Steel  dropped  out  and 
only  a  few-  remained  who  could  meet  the  lowest  prices. 

Another  letter  of  Mr.  Carnegie  to  his  company  is  given  in 
evidence  in  which  he  says: 

My  view  is  that  sooner  or  later  Harrisburg  (Pennsylvania  Steel 
Company),  Sparrows  Point  (Maryland  Steel  Company),  and  Scranton 
(predecessor  of  Lackawanna  Steel  Company)  will  cease  to  make  rails 
like  Bethlehem  (Bethlehem  Steel  Company).  The  autumn  of  last  year 
seemed  as  good  a  time  to  force  them  out  of  business  as  any  other.  It 
did  not  prove  so.     The  boom  came  and  cost  us  a  great  deal  of  money. 

The  policy  of  taking  orders,  even  without  profit,  was  the  de- 
structive competition  of  that  era.  "To  keep  running,  not  to 
make  profit,  is  the  point  we  should  steer  to,"  was  the  direction 
to  the  Carnegie  Steel  Company.  "Take  every  order,  otherwise 
we  come  to  a  stop  and  only  feed  competitors  who  would  close  if 
we  went  to  rock  prices."  Such  being  the  policy,  the  proofs 
leave  no  doubt  as  to  its  effect.  Mr.  Schwab  testified :  That  the 
destruction  of  the  small  and  weak  (competitors)  was  a  practice 
not  unknown  in  the  old  days.  It  was  rather  extensively  carried 
on.  It  was  at  times  with  quite  effective  and  marked  results. 
That  he  did  not  know  what  percentage  of  them  emerged  from 
the  steel  wars  in  the  old  days.  Not  many.  There  were  more 
gravestones  than  live  competitors.  That  they  did  everything 
they  could  to  secure  all  the  business  they  could  secure,  regard- 
less of  the  price  at  which  they  secured  it.  That  it  was  pretty 
hard  on  the  competitors  at  times,  but  that  was  their  policy  and 
one  that  it  was  very  difficult  to  break  away  from. 

Referring  to  one  of  these  ruinous  trade  wars  between  two 
large  steel  companies,  Powell  Stackhouse,  president  of  the  Cam- 
bria Steel  Company,  which  was  not  one  of  the  participants, 
testified : 

Q.  How  nearly  can  you  fix  the  time  of  what  you  called  the  Gates 
and  Carnegie  row  ? 

A.    That  was  somewhere  in  the  '90 's  ;  in  the  latter  part  of  the   90 's. 


128  TRUSTS,    POOLS   AND    CORPORATIONS 

Q.    About  1897,  or  somewhere  along  there? 

A.  Somewhere  along  there  ;  from  1895.  I  would  not  be  sure  of 
that. 

Q.  And  that  was  followed,  I  judge,  from  w-hat  you  say,  by  rather 
a  fierce  trade  war  lasting  a  year  or  tw^o  ? 

A.    Yes  ;  in  all  lines  of  steel. 

Q.    In  all  lines  of  steel  ? 

A.  Yes,  everything.  As  a  result  of  that,  there  was  the  keenest 
competition  and  steel  was  sold,  bar  steel,  at,  I  think,  less  than  nine- 
tenths  of  a  cent. 

Q.    And  it  cost  more  than  that  to  make  it  ? 

A.    Yes  ;  a  good  bit  more. 

Q.  And  the  consequence  of  this  was  very  serious  to  trade,  was 
it  not  ? 

A.  It  was  serious  to  everybody  in  the  trade.  It  was  verj'  serious, 
for  instance,  to  the  warehousemen,  that  had  some  thousand  or  more 
tons  of  steel,  or  whatever  they  might  have  on  hand.  Their  stocks 
were  probably  reduced  from  one  or  two  cents  a  pound  way  down. 

Q.    That  warfare  left  a  trail  of  ruin  ? 

A.    Yes  ;  it  did. 

Q.    There  were  a  great  many  failures  on  account  of  it  ? 

A.   Yes. 

Q.    And  general  business  disaster  ? 

A.    General  depression. 

Q.    And  business  disaster  ? 

A.    Yes,  sir. 

Q.    And  failure  and  bankruptcy  ? 

A.    Yes,  sir. 

Q.    (continuing)    — were  the  direct  effect  of  it,  were  they  not? 

A.   Yes. 

Q.   You  had  had  trade  wars  before,  I  suppose,  had  you  not? 

A.   Yes. 

Q.   But  none  so  severe  as  that  ? 

A.    None  so  severe  as  that. 

Q.  But  they  were  always  attended  with  injury  to  the  business,  and 
especially  to  the  warehousemen  or  middlemen,  were  they  not  ? 

A.  Yes,  sir.  The  middleman  had  bought  and  had  his  material  on 
hand,  and,  overnight,  by  the  price  falling  a  few  dollars  a  ton  — 

Q.    (interposing)     He  was  ruined  ? 

A.  He  was  ruined  in  some  cases.  Some  of  them  carry  very  large 
stocks. 


COMBINATION    IN    THE   STEEL   INDUSTRY  129 

Q.  The  effect,  I  suppose,  of  such  warfares,  and  particularly  the 
Gates  and  Carnegie  warfares,  was  felt  mostly  by  the  weaker  concerns 
in  the  business  ? 

A.    We  all  felt  it. 

Q.    You  all  felt  it,  but  the  stronger  ones  weathered  it  ? 

A.    Certainly. 

Q.    And  the  weaker  ones  all  went  to  the  wall  ? 

A.    They  were  weakened  so  that  they  gradually  dropped  out. 

Q.    They  gradually  dropped  out  ? 

A.    Yes,  sir. 

Q.  So  the  effect  of  that  was  not  confined  to  the  manufacturers, 
but  was  felt  even  more  by  the  warehousemen  and  jobbers,  was  it  not? 

A.  Yes.  They  could  measure  their  loss  at  once.  If  they  knew 
what  their  inventory  was  and  the  difference  between  what  they  paid 
and  what  prices  had  fallen  to,  they  could  measure  their  loss  at  once. 

Q.    What  about  the  retailers?     What  was  the  effect  on  them  ? 

A.  The  same  thing.  Anybody  that  carried  a  stock  of  steel  or  iron 
on  hand,  if  the  value  of  that  stock  was  reduced  $5  or  $10  a  ton,  just 
simply  had  to  write  off  that  amount. 

Indeed,  the  general  competitive  policies  of  the  steel  companies 
toward  each  other  is  well  summarized  by  the  chairman  of  the 
Steel  Corporation,  who  says  : 

On  the  other  hand,  in  olden  days,  the  rule  in  this  country  was  differ- 
ent in  this  line  of  business.  I  have  no  doubt  the  suggestion  of  Mr. 
Carnegie,  which  was  read  in  court  a  few  clays  since  when  I  was  present, 
represented  not  only  his  views,  but  the  views  of  his  associates,  and  the 
views  generally  held  amongst  those  who  were  in  charge  of  the  iron  and 
steel  industry  of  this  country.  There  was  a  competition  that  was  bitter, 
fierce,  destructive.  If  it  did  not  absolutely  drive  competitors  out  of 
business,  it  so  harassed  and  injured  them  as  to  prevent  them  from  ex- 
tending their  business,  or  from  taking  advantage  of  their  location,  and 
at  times  compelled  them  to  close  their  mills,  discharge  their  employes, 
and  disrupt  their  organization,  and,  in  fact,  was  a  competition  that, 
in  the  opinion  of  those  in  charge  of  the  United  States  Steel  Corpora- 
tion, I  might  say  the  opinion  of  those  in  control  of  the  industry  gen- 
erally in  this  country  at  the  present  time,  was  calculated  to  destroy, 
to  injure  instead  of  build  up,  to  prevent  extensions  of  trade,  to  limit 
the  capacity  or  the  opportunity  of  many  who  were  engaged  in  the 
trade. 


130  TRUSTS,    POOLS   AND   CORPORATIONS 

And  in  that  connection  it  should  be  noted  that  no  testimony 
has  been  produced  in  this  record  that  a  return  to  the  old  trade 
war  system  of  ruinous  competition  would,  as  a  matter  of  fact, 
benefit  the  public  interests.  On  the  contrary,  the  proof  is  that 
present  business  methods  and  ethics  are  more  to  be  desired. 
As  expressive  of  the  view  of  those  in  the  steel  business  who  are 
not  connected  with  the  Steel  Corporation,  we  may  note  the  testi- 
mony of  the  president  of  one  of  the  largest  steel  castings  com- 
panies in  the  country,  who  says  : 

Before  the  formation  of  the  Steel  Corporation,  business  ethics,  I 
might  say,  were  in  very  bad  shape ;  competitors  had  no  confidence  in 
each  other ;  they  resorted  to  subterfuges,  misrepresentation,  and  false 
statements.  That  same  lack  of  confidence  existed  between  sellers  and 
many  purchasing  agents.  It  was  a  very  undesirable  condition  in 
which  to  do  business.  For  the  past  seven  or  ten  years  (in  later  times, 
at  any  rate)  all  that  misunderstanding  or  misgiving  has  been  displaced 
by  manly,  straightforward  dealing.  I  do  not  think  it  could  have  been 
brought  about  without  the  Steel  Corporation's  influence  and  example. 
The  benefit  of  that  example  has  extended  into  collateral  industries  like 
ours.  I  have  noticed  an  improvement  in  the  competition  of  our  own 
business  in  an  ethical  way.  We  still  have  the  competition,  but  we  do 
not  try  to  misrepresent  or  tell  lies  any  more.  We  are  honestly  friends 
now.  Then  we  pretended  to  be  friends,  but  were  the  bitterest  enemies. 
It  appears  to  be  an  improvement  that  pervades  the  entire  steel  line, 
and  being  the  largest  unit,  the  most  influential  unit,  and  setting  a 
commendable  example,  has  led  us  all  to  realize  that  it  is  a  betterment. 

A  study  of  these  proofs  satisfies  us  that,  apart  from  all  ethical 
questions,  the  strong  trend  of  the  steel  business  at  the  close  of 
the  last  century  was  toward  driving  competitors  out  of  business 
by  cutting  prices;  and  that  the  business  policy  inaugurated  by 
the  Steel  Corporation,  and  in  which  poHcy  its  competitors  sub- 
sequently followed,  has  resulted,  in  the  ten  years  of  its  exist- 
ence :  First,  in  a  more  general  division  of  business  between  all 
competitors  in  the  steel  business  than  under  the  older  system  ; 
second,  in  tending  to  minimize  the  shutting  down  of  its  own 
and  its  competitors'  plants  in  times  of  depression  ;  third,  it  has 
made  steel  products  nonspeculative,  and  has  therefore  benefited 
all  dependent  iron  and  steel  manufacturers  by  enabling  them  to 


COMBINATION    IN    THE   STEEL   INDUSTRY  131 

have  a  steady,  nonspeculative  supply  of  those  basic^^sieel  prod- 
ucts on  which  their  plants  depend  for  operation.  The  evidence  . 
on  which  these  conclusions  are  based  is  corroborated  by  the 
business  facts  and  business  results  which  we  now  summarize 
in  the  working  out  of  this  policy  for  ten  years  by  the  Steel 
Corporation  and  its  competitors.  During  that  time  the  business 
of  both  competitors  and  steel  company  has  increased  very 
largely,  but  it  is  highly  suggestive,  indeed,  conclusive,  proof 
that  the  Steel  Company  had  neither  monopolistic  control  or 
power  to  restrain  trade,  since  the  proportion  of  trade  increase 
was  very  materially  greater  on  the  part  of  the  Steel  Corpora- 
tion's competitors  than  its  own.  These  significant  figures  prove 
that  mere  size,  or  bigness  of  business,  is  not  necessarily  a  mo- 
nopoly of  business  at  the  expense  of  all  others  engaged  in  it. 
And  in  that  connection,  and  as  aptly  expressive  of  our  views, 
we  may  quote  with  approval  the  language  of  Judge  Hook  of 
the  Eighth  Circuit,  in  his  concurring  opinion  in  the  Standard 
Oil  case : 

Success  and  magnitude  of  business,  the  rewards  of  fair  and  honor- 
able endeavor,  were  not  among  the  evils  which  threatened  the  public 
welfare  and  attracted  the  attention  of  Congress.  But  when  they  had 
been  attained  by  wrongful  or  unlawful  methods,  and  competition  has 
been  crippled  or  destroyed,  the  elements  of  monopoly  are  present. 

In  the  most  important  element  of  steel  rails,  an  item  on  which 
great  stress  has  been  laid  as  a  most  important  factor  of  mo- 
nopoly, and  control  of  prices,  we  find  that,  in  spite  of  the 
general  increase  of  rail  production,  the  Steel  Corporation's 
relative  proportion  of  rail  business  has  fallen  off  nearly  8  per 
cent,  while  its  competitors  have  increased  correspondingly.  In 
the  great  basic  item  of  steel  ingots,  on  which  the  great  bulk  of 
steel  manufacturing  rests,  while  the  Steel  Company's  ingot 
business  increased  44  per  cent,  its  competitors'  ingot  business 
grew  nearly  three  times  as  fast,  viz.,  137  per  cent.  To  say  that 
any  monopoly  of  ingots  existed  when  this  bill  was  filed,  that  it 
now  exists,  or  that  it  can  exist,  is  simply  to  run  counter  to  the 
testimony  of  ten  years'  business  experience  and  to  the  evidence 
in  this  record.     In  the  great  item  of  structural  shapes,  which 


132  TRUSTS,    POOLS   AND   CORPORATIONS 

enter  into  bridges,  building,  and  other  common  uses,  while  the 
business  of  the  Steel  Company  in  these  years  increased  nearly 
one  half,  to  be  exact  42.7  per  cent,  its  competitors  have,  during 
these  years,  gone  ahead  nearly  four  times  as  fast,  164.4  P^r  cent, 
and  in  that  connection  it  will  be  observed,  as  heretofore  shown, 
that  a  large  part  of  the  increase  of  the  Steel  Company's  struc- 
tural product  was  in  the  foreign,  not  in  the  home,  market,  in 
which  latter  market  it  has  more  than  300  fabricating  competitors. 
Practically  the  same  proportions  exist  in  wire  rods,  the  basic  of 
wire  fences,  and  other  articles  of  widespread  use.  In  wire  rods, 
the  Steel  Corporation  has  increased  its  business  49.7  per  cent; 
its  competitors  182.2  per  cent,  nearly  four  times  as  fast.  So  also 
a  monopoly  of  the  tin  plate  industry  was  feared,  while  the  out- 
come shows  the  Steel  Corporation  has  in  tin  plate  and  terne 
plate  increased  63  per  cent,  its  competitors  have  increased  three- 
fold as  fast.,  viz.,  186  percent.  So  in  the  pipe  industry.  Instead 
of  there  being  a  monopolistic  and  exclusive  growth,  there  has 
been  a  relative  retrogression,  for  while  the  pipe  business  of  the 
Steel  Corporation  has  largely  increased  (in  wrought  pipe  36  per 
cent  and  in  seamless  tubes  100  per  cent),  its  competitors  have 
increased  nearly  six  times  as  fast  (in  wrought  pipe  209.9  P^r  cent 
and  in  seamless  tubes  over  seven  times  as  fast,  750  per  cent). 
In  the  item  of  pipe  alone,  it  has  already  been  noted  in  the 
testimony  of  the  general  manager  of  a  great  gas  company  that, 
as  a  buyer  of  pipe,  it  enjoys  active  competition  between 
13  concerns. 

These  facts  and  figures  conclusively  answer  the  charges  of 
monopoly  and  restraint  in  the  home  market.  We  are  therefore 
justified  in  answering  in  the  negative  the  question  to  which  the 
foregoing  part  of  this  opinion  is  addressed,  namely,  Was  the 
United  States  Steel  Corporation,  at  the  time  this  bill  was  filed, 
then  prejudicing  the  public  interests  by  unduly  obstructing  the 
steel  and  iron  business  of  the  United  States .'' 

We  turn  next  to  the  steel  and  iron  trade  with  foreign  nations  and 
address  ourselves  to  the  second  question,  namely.  Was  the  United 
States  Steel  Corporation,  at  the  time  this  bill  was  filed,  then 
prejudicing  the  public  interests  by  unduly  restricting  or  unduly 
obstructing  the  steel  and  iron  business  with  foreign  nations  ? 


COMBINATION    IN   THE   STEEL   INDUSTRY  133 

In  taking  up  that  question,  it  is  to  be  noted  thaL«.the  entire 
foreign  business  here  in  question  is  now  carried  on,  not  by  the 
Steel  Corporation,  but  by  a  subsidiary  of  the  Federal  Steel 
Company  called  the  United  States  Steel  Products  Company. 
This  company  was  formed  in  1903,  and  the  Federal  Steel  Com- 
pany is  the  owner  of  its  stock.  This  Products  Company  is  not 
made  a  party  to  this  bill,  and  there  is  no  prayer  for  its  dissolution. 
All  other  subsidiary  companies  of  the  Steel  Corporation  are  made 
parties,  and  their  dissolution  in  many  cases  prayed  for.  Whether 
the  omission  of  the  Products  Company  from  the  bill,  and  the 
absence  of  any  prayer  for  its  dissolution,  was  an  omission,  or  was 
advisedly  done,  with  the  purpose  of  conserving  its  foreign  trade, 
does  not  appear.  But  the  absence  of  a  formal  prayer  for  the 
dissolution  of  the  Products  Company  is,  however,  of  no  practical 
importance,  for  the  continuance  of  such  foreign  trade  of  the 
Products  Company  is  manifestly  dependent  on  the  manufactur- 
ing facilities,  the  product  diversity,  and  the  financial  ability  of 
the  Steel  Corporation.  If,  therefore,  the  Steel  Corporation  be 
dissolved  by  this  court,  the  Products  Company  will  be  divested 
of  the  practical  commercial  power  of  continuing  its  foreign 
trade,  since  the  proof  is  that  80  per  cent  of  the  goods  it  sells 
necessarily  comes  from  the  Pittsburgh  district  in  which  the 
Federal  company  has  but  little  production.  If  the  Federal 
company  be  also  dissolved,  then  the  Products  company  will,  of 
course,  be  left  without  any  mills  or  plants  which  are  so  located 
as  to  do  export  business,  but  2  per  cent  of  the  Federal  Steel 
Company's  product  now  going  into  foreign  trade.  So  that  the 
foreign  trade  of  the  Products  company,  if  acquired  and  held  in 
violation  of  the  Sherman  Law,  can  be  as  effectually  ended  by  a 
dissolution  of  the  Steel  Corporation,  or  the  Federal  Steel  Com- 
pany, as  though  the  Products  company  had  been  made  a  party 
to  this  proceeding  and  its  dissolution  prayed  for  and  decreed. 

It  is  apparent  that  the  monopolization  and  restriction  of  foreign 
trade  must,  in  the  nature  of  things,  consist  of  either  taking  away 
from  others  a  foreign  trade  which  already  existed,  or  if  such 
foreign  trade  was  not  in  existence,  then  in  building  up  or  main- 
taining such  foreign  trade  by  preventing  or  restraining  others 
from  entering;  it. 


134  TRUSTS,    POOLS   AND    CORPORATIONS 

Now  foreign  trade  is  not  a  mere  general,  theoretical  abstrac- 
tion of  selling  abroad,  but  is  a  concrete,  definite,  commercial 
business  proposition  in  iron  and  steel.  We  have  our  domestic 
trade,  which  consists  in  supplying  domestic  use  or  consumption. 
And  such  domestic  use  necessitates  one  having  or  taking  to  the 
market  where  his  customer  is  located  the  articles  the  latter  wants 
to  buy.  It  goes  without  saying  that  if  one  man  has  a  wire  mill 
at  Pittsburgh  situate  near  another  man's  billet  mill,  and  that 
billet  mill  has  in  its  warehouse  at  all  times  an  ample  supply  of 
billets  to  run  the  wire  mill,  (the  proofs  show  i8  different  analyses 
of  such  billets  are  required),  the  wire  mill  owner  will  prefer  to 
deal  with,  and  will  deal  with,  the  billet  mill  in  Pittsburgh  in 
preference  to  dealing  with  one  at  Chicago.  And  this  is  so,  be- 
cause freights  are  eliminated ;  uncertainties  of  railroad  transpor- 
tation are  avoided ;  if  materials  prove  faulty  or  not  of  the  right 
metallic  character,  the  mischief  can  at  once  be  remedied.  Of 
course,  if  the  Chicago  mill,  from  any  motive,  chooses,  either  from 
overproduction,  business  needs  or  other  causes,  to  offer  the  wire 
mills  at  Pittsburgh,  billets  at  a  lower  price  than  the  Pittsburgh 
mill,  a  sale  might  be  made ;  but  this  occasional  purchase  could 
and  would  result  in  no  estabHshed,  normal  trade  between  the 
Chicago  billet  mill  and  the  Pennsylvania  wire  mill.  The  only 
way  such  normal  trade  relation  could  be  established  would  be  by 
the  Chicago  manufacturer  locating  a  permanent  stocked  ware- 
house near  the  Pittsburgh  wire  mill.  If  its  cost  of  production 
was  so  low  and  it  could  pay  the  freight  from  Chicago  to  Penn- 
sylvania, and  could  furnish  in  quality,  quantity  and  price  the 
same  product  as  the  Pittsburgh  mill,  then,  and  then  only,  could 
it  hope  to  have  normal,  continuous  trade  with  the  Pittsburgh 
wire  mill.  We  take  this  homely  but  suggestive  illustration  to 
emphasize  what  the  proofs  show  are  the  demands  and  require- 
ments in  foreign  iron  and  steel  markets  which  confront  an 
attempt  to  enter  them,  and  that  such  market  is  not  to  be  held  by 
the  mere  occasional  shipping  of  goods  to  foreign  countries. 
Moreover,  in  considering  the  possible  range  of  foreign  iron  and 
steel  markets  for  American  iron  and  steel,  there  must  first  be 
excluded  from  that  market,  Germany,  P'rance,  Austria,  Italy 
and    Russia.      The   proof  is  that  the  tariffs  of   each  of  those 


COMBINATION    IN    THE    STEEL   INDUSTRY  135 

countries  prevent  the  sale  there  of  American  iron  and  steel. 
The  proofs  also  show  that  the  attitude  of  the  EnglisKpublic  and 
the  hostility  of  English  labor  organizations  toward  American  iron 
and  steel  likewise  prevent  American  iron  and  steel  products 
entering  England,  save  wire  fences,  the  manufacture  of  which 
is  only  now  being  taken  up  there.  It  follows,  therefore,  that  the 
iron  and  steel  trade  of  the  United  States  with  foreign  nations 
must  be  largely  built  up  in  other  parts  of  the  world,  and  such 
has  been  the  outcome  of  the  efforts  of  this  company  as  shown 
by  the  proofs.  Referring  to  trade  in  such  nations  as  are  not 
closed  to  the  iron  and  steel  business  by  their  tariffs,  these  in 
a  general  way  are  the  steel  markets  of  Asia,  Africa,  the  British 
Colonies,  all  South  America,  Cuba  and  Mexico.  But  while 
these  markets  are  open,  they  were,  when  the  Steel  Corporation 
was  formed,  "practically  preempted  by  foreign  manufacturers 
and  foreign  merchants;  that  is,  principally  continental  concerns, 
English  concerns,  as  well  as  having  branch  offices  and  ware- 
houses in  all  of  the  consuming  markets  of  the  world.  It  was  a 
very  difficult  thing  to  enter  those  markets.  The  European  manu- 
facturers had  been  established  in  the  markets  of  South  America, 
Asia,  Africa,  and  the  Orient,  some  of  them  over  50  years.  There 
was  not  only  a  prejudice,  but  a  hostiUty,  in  most  cases  against 
newcomers  in  the  trade.  In  order  to  get  a  foothold  in  these 
markets,  we  usually  had  to  sell  below  the  prices  of  the  concerns 
that  were  estabUshed  there,  and  who  had  their  customers  and 
native  salesmen,  and  all  the  advantages  that  go  with  a  long 
occupation  of  a  business  in  any  foreign  country.  It  is  more  the 
custom  in  foreign  countries  than  it  is  here  for  people  to  attach 
to  themselves  customers  that  buy  from  them  regularly." 

Moreover  the  proofs  show,  and  such  would  seem  to  be  the 
manifest  commercial  fact  that : 

It  is  impossible  to  develop  a  foreign  business  unless  it  is  done  con- 
tinuously. Buyers  will  not  patronize  people  who  are  not  in  a  position 
to  give  them  a  continuous  source  of  supply. 

Without  entering  upon  a  discussion  of  other  matters,  it  suffices 
to  say  that,  not  only  were  these  foreign  markets  preempted  and 
tenaciously  held  by  foreign  manufacturers,  foreign  merchants 


136  TRUSTS,    POOLS   AND    CORPORATIONS 

and  foreign  bankers  who  refused  to  finance  importing  enterprises 
there  unless  there  was  a  stipulation  that  all  materials  should  be 
bought  in  such  bank's  own  country,  but  the  markets  required 
the  maintenance  of  varied  lines  of  products,  the  only  way  to 
supply  which  varied  lines  was  by  maintaining  varied  lines  of 
finishing  mills  at  home  and  the  maintenance  of  large  warehouses 
abroad.  The  proofs  in  the  case  show  that  in  1901,  when  the 
Steel  Company  was  formed,  with  the  exception  of  wire  exporta- 
tions  —  which  for  various  reasons  was  not  broadly  successful  — 
there  was  no  iron  and  steel  trade  of  an  established  or  continuous 
character  between  American  iron  and  steel  manufacturers  and 
foreign  nations.  It  is  true  there  were  spasmodic  exports  which 
at  times  amounted  to  considerable  volume,  but  they  were  not 
continuous  or  sustained,  and  they  resulted  in  no  estabhshed  trade 
or  dealing.  Indeed,  in  many  cases  the  nature  of  this  spasmodic 
trade  was  such  as  to  create  a  hostile  feeling  toward  any  subse- 
quent effort  on  the  part  of  American  iron  and  steel  trade  to  enter 
the  same  foreign  market.  The  proofs  show  that  at  that  time  and 
for  many  years  previous,  so  long  as  the  demand  of  the  home 
market  was  sufficient  to  absorb  their  product,  our  iron  and  steel 
manufacturers  made  no  effort  to  sell  their  output  abroad.  When, 
however,  the  reverse  was  the  case,  and  they  had  on  hand  a 
surplus  product  for  which  there  was  no  domestic  trade,  they  went 
into  the  foreign  market  and  tried  to  get  rid  of  such  surplus 
product  there.  The  European  and  American  steel  and  iron 
market  being  interrelated,  the  proof  is  that,  in  addition  to  paying 
the  freight  to  get  his  goods  to  the  foreign  market,  the  American 
manufacturer  had,  in  order  to  get  customers  away  from  the 
foreign  manufacturers  who  were  already  in  possession  of  such 
trade,  to  cut  the  price  when  they  sold  in  the  foreign  market. 
This  spasmodic  course  grew  to  be  known  in  the  steel  business 
as  "dumping,"  and  may  be  well  likened  to  the  bargain  sales  by 
which  a  merchant  seeks  to  dispose  of  a  surplus  stock  which  he 
cannot  sell  at  normal  prices.  It  will,  of  course,  be  obvious  that 
a  manufacturer  could  not  continue  such  low-price  dumping  any 
more  than  a  merchant  could  dispose  of  all  his  stock  —  instead  of 
his  surplus  stock  —  at  bargain  prices.  The  proofs  show  the  same 
course  of  dumping  abroad  in  times  of  depressed  markets  was 


COMBINATION    IN   THE   STEEL   INDUSTRY  137 

followed  by  European  steel  manufacturers  in  our  majjs£t.  The 
then  status  of  American  steel  manufacturers  is  shown  by  the 
proven  experience  of  the  Carnegie  Steel  Company.  It  was  the 
most  aggressive  of  any  of  the  steel  companies  to  enter  foreign 
trade,  exporting  70  per  cent  of  the  then  steel  exports.  The 
Carnegie  Company's  location,  facilities  and  freight  rates  enabled 
it  better  than  most  other  companies  to  enter  foreign  trade,  and 
from  its  works,  as  the  foreign  trade  of  the  Steel  Corporation 
developed,  such  trade  to  the  extent  of  24  per  cent  of  the  entire 
product  of  the  Carnegie  Company  goes  into  such  export  trade. 
It  will  therefore  appear  that  the  Carnegie  Company  can  be 
fairly  regarded  as  the  best  fitted  of  American  steel  companies  to 
compete  for  export  trade.  Referring  to  that  time,  the  president 
of  that  company  testified  : 

We  had  made  spasmodic  attempts  at  it.  In  dull  times  when  busi- 
ness could  not  be  secured  at  home,  we  would  make  attempts  at  foreign 
business  by  going  in  and  making  an  unusual  price,  which  was  the  only 
way  that  any  foreign  business  could  be  secured  then,  inasmuch  as  we 
had  not  an  established  business  or  business  connection,  and  therefore 
customers  were  not  inclined  to  buy  from  a  firm  who  could  only  furnish 
them  occasionally. 

The  relation  of  the  Carnegie  Company  to  foreign  trade  is 
shown  by  its  minutes.  From  the  proofs  in  the  case  three 
things  seem  settled,  namely :  That  when  the  steel  Corporation 
was  formed  American  steel  manufacturers  had  no  real  dependable 
export  trade  abroad ;  that  such  sales  as  they  made  were  spas- 
modic, made  with  a  view  to  dumping  surplus  product ;  and  such 
sales  were  secured  by  underselling  the  European  market  when 
they  had  no  home  market.  It  will  also  appear  that  being  ex- 
cluded by  the  steel  tariffs  of  Germany,  France,  Russia,  Austria 
and  Italy,  and  by  other  causes  from  England,  such  dependable 
foreign  markets  as  were  open  for  them  to  build  up,  as  will  be 
seen  later,  had  to  be  found  in  other  parts  of  the  world.  This 
summary  of  the  situation  is  warranted  by  the  study  of  the  proofs. 

Seeing,  then,  that  when  the  Steel  Corporation  was  formed, 
no  such  volume  of  foreign  trade  in  steel  existed ;  that  the  ac- 
quisition of  any  part,  or  indeed  the  whole  of  it,  could  constitute 


138  TRUSTS,    POOLS   AND    CORPORATIONS 

a  restraint  of  trade  with  other  countries  ;  and  seeing  that  the 
foreign  trade  which  the  Steel  Corporation  had  during  its  earUer 
years  had  increased  from  approximately  $31,000,000  to  $91,000,- 
000  — we  turn  to  the  next  question,  Did  the  Steel  Company 
acquire  this  original  or  additional  trade  by  monopolizing  or  re- 
straining foreign  trade,  or  attempting  to  do  so ;  or,  on  the  other 
hand,  was  its  acquisition  the  natural  and  normal  growth  of  fair 
business  effort  ?  We  have  said  the  foreign  trade  of  the  Steel 
Company  in  191 1  was  $91,000,000,  but  of  that  amount  some 
$30,000,000  is  really  not  solely  its  own,  but  was  shared  by 
it  with  other  American  steel  manufacturers.  To  explain,  it  will 
hereafter  appear  that  in  the  development  of  a  foreign  steel 
trade,  the  Steel  Corporation  has  established  agencies,  ware- 
houses, freight  communications  and  other  exporting  agencies  in 
many  of  the  markets  of  the  world.  As  we  read  the  testimony, 
in  reference  to  this  $30,000,000  of  foreign  trade,  it  seems  that 
if  an  American  manufacturer  of  steel  finished  products,  for 
example,  locomotives,  oil  tanks,  gas  tanks,  cars,  etc.,  had  an  in- 
quiry, or  desired  to  make  a  bid  to  furnish  such  goods  in  some 
foreign  country,  where  such  manufacturer  did  not  have,  but  the 
Steel  Corporation  did  have,  a  representative,  the  Steel  Corpora- 
tion would,  on  request,  ascertain  and  report  to  the  American 
tank  manufacturer  what  price  he  would  have  to  put  on  his 
tanks,  etc.,  to  get  into  the  desired  foreign  market.  The  ability 
of  the  tankmaker  to  meet  such  foreign  competitive  price  in  the 
prospective  buyer's  market  depended,  amongst  other  things,  on 
two  items  —  the  cost  of  the  sheets  from  which  his  tank  was 
made,  and  the  freight  cost  of  dehvering  the  tank.  In  case  the 
current  prices  of  such  sheets  in  the  American  steel  market  were 
such  that  the  tankmaker  could  not  sell  his  tank  low  enough  to 
compete  with  the  foreign  bidder  the  Steel  Corporation  would 
agree  to  furnish  the  plates  at  such  lower  price  as  would  enable 
the  tankmaker  to  underbid  his  foreign  competitor.  This  price 
reduction,  coupled  with  the  fact  that  the  Steel  Corporation 
would  forward  the  tanks  with  its  own  freight,  enabled  the  tank- 
maker  and  the  Steel  Corporation  to  thus  jointly  sell  the  tank, 
which  neither  could  do  alone.  By  such  operations,  where  it 
made  the  basic  material,  but  did  not  make  the  finished  article, 


COMBINATION    IN   THE   STEEL   INDUSTRY  139 

the  Steel  Corporation,  in  191 1,  thus  did  ^30,000,000^  in  trade 
abroad  in  finished  steel  products  in  cooperation  with  other 
American  manufacturers.  The  proofs  show  that  this  course  of 
price  reduction  was  followed  in  order  to  induce  American  manu- 
facturers of  finished  steel  products  to  cooperate  with  the  Steel 
Corporation  in  extending  the  latter's  foreign  trade.  The  un- 
contradicted proof  in  that  regard  is  that  these  foreign  reduction 
prices  thus  given  to  American  manufacturers  to  enable  them  to 
compete  in  the  foreign  markets  were  "  open  to  all  comers ;  any- 
body that  wanted  to  develop  a  foreign  business  received  our 
assistance,  not  only  in  the  way  of  special  prices,  but  we  would 
lend  him  a  salesman  in  a  foreign  country  and  place  our  office  at 
his  disposal  and  help  him  in  every  way  to  build  up  a  foreign 
business.  .  .  .  Our  office  is  an  encyclopedia  for  the  manu- 
facturers of  the  United  States,  particularly  in  iron  and  steel 
and  those  collateral  lines.  We  have  never  hesitated  to  give 
information  with  regard  to  conditions  in  countries,  and  the 
credit  of  people  whom  we  may  have  been  doing  business  with, 
and  especially  facilities  and  information  generally  with  regard 
to  tariffs  in  countries  and  railway  facilities  for  internal  dis- 
tribution generally.  ...  I  had  prepared  under  my  direction 
a  Hst,  I  think,  of  about  158  manufacturers  to  whom  we  have 
made  a  special  allowance  in  order  to  enable  them  to  develop 
a  foreign  business." 

The  proofs  show  that  this  large  volume  of  business,  termed 
by  the  Steel  Company  "reexport"  business,  and  amounting,  as 
stated,  to  $30,000,000  in  191 1,  was  shared  in  by  158  other  firms 
or  companies,  and  in  making  such  reexport  articles  from  15,000 
to  18,000  men  were  employed.  The  proof  is  that  on  ocean 
freights  the  Steel  Corporation  had  no  rebate  or  advantage  over 
its  competitors.  It  will  be  observed  that  in  thus  reducing  the 
price  of  basic  steel  materials  to  enable  manufacturers  to  enter 
the  foreign  markets,  the  Steel  Corporation  has  pursued  the 
same  helpful  course  of  lower  freights  for  exports  which  the 
Interstate  Commerce  Commission  has,  since  1903,  approved  of 
the  railroads  doing.  In  that  regard  the  proofs  show  if  a  ship- 
ment is  made  from  Pittsburgh  to  New  York  under  a  bill  of  lad- 
ing beginning  and  ending  with  Pittsburgh  and  New  York,  that 


140  TRUSTS,    POOLS   AND    CORPORATIONS 

where  it  is  known  that  it  is  going  to  be  exported  the  rate  is  less 
than  when  it  is  known  it  is  going  to  stop  in  New  York ;  the 
tariffs  are  published.  .  .  .  There  is  an  export  rate  and  a 
domestic  rate,  and  the  government  has  encouraged  the  export 
business  to  the  extent  of  permitting  the  Interstate  Commerce 
Commission  to  make  export  rates.  The  export  rates  have  been 
in  effect  since  1903. 

And  we  may  add  the  proofs  show  that  the  Interstate  Com- 
merce Commission  has  gone  to  the  extent  of  differentiating 
among  different  articles  for  export,  making  freights  on  export 
rails  lower  than  on  other  export  articles.  We  may  here  say 
that  the  Interstate  Commerce  Commission  and  the  railroads  in 
thus  cooperating  with  the  Steel  Corporation,  and  these  other 
manufacturers  in  allowing  lower  freights  from  interior  points  to 
the  seaboard  on  goods  intended  for  export,  have  followed  the 
policy  adopted  in  European  countries.  In  that  regard  the 
proofs  show  : 

The  German  government  and  the  German  railroads  help  for  the  ex- 
port of  finished  products,  but  they  charge  the  full  domestic  rate  for 
any  finished  product  that  is  imported. 

Passing  on,  then,  from  this  $30,000,000  of  the  foreign  trade 
which  the  Steel  Company  has  created  for  itself  by  inducing  do- 
mestic consumers  of  its  basic  products  to  jointly  enter  into  a 
foreign  trade,  and  considering  the  other  foreign  trade,  $60,000,- 
000,  which  is  its  own,  we  examine  the  evidence  as  to  whether 
the  creation  and  building  up  of  this,  its  own  foreign  trade,  in- 
volves monopoly  or  restraint  of  trade.  This  becomes  all-im- 
portant, because  the  Steel  Corporation  contends  that  the 
creation  and  building  up  of  a  foreign  steel  and  iron  trade  was 
one  of  the  controUing  reasons  that  led  to  its  formation,  and  not 
a  purpose  to  restrain  or  monopolize  interstate  home  trade.  In 
that  regard  the  contention  of  the  Steel  Corporation  is  that  no 
such  foreign  steel  and  iron  trade  could  be  built  up  without  the 
large  resources  of  the  Steel  Company,  and  the  varied  products 
which  the  integration  and  combination  of  its  units  alone  made 
possible.  The  mere  statement  of  this  contention  shows  its  im- 
portance, for  if  the  twofold  purpose  of  this  statute  is  to  foster 


COMBINATION    IN    THE   STEEL   INDUSTRY  141 

and  protect  trade,  both  foreign  and  interstate,  and^  foreign 
trade  cannot  be  increased  without  some  such  mechanically 
varied  and  financially  strong  agency  as  this  Steel  Corporation, 
then  manifestly  such  agency  is  not  a  violation  of  a  statute  whose 
purpose  was  to  permit  —  not  to  prevent  —  the  normal,  natural 
and  to  be  desired  development  of  unrestrained,  unmonopolized 
trade,  both  foreign  and  domestic.  In  taking  up  this  question, 
we  dismiss  once  and  for  all  the  question  of  mere  volume  or  big- 
ness of  business.  The  question  before  us  is  not  how  much 
business  was  done,  or  how  large  the  company  that  did  it  —  the 
vital  question  is,  how  was  the  business,  whether  big  or  little, 
done  —  was  it,  in  the  test  of  the  Supreme  Court,  done  by  prej- 
udicing the  public  interests,  by  unduly  restricting  or  unduly  ob- 
structing trade  ?  The  question  is  one  of  undue  restriction  or 
obstruction  of  trade,  and  not  of  undue  volume  of  trade.  If 
mere  size  were  the  test  of  monopoly  and  trade  restraint,  we  have 
not  one,  but  a  half  dozen  unlawful  monopolies  in  the  large  de- 
partment stores  of  a  single  city.  If  a  manufacturing  and  sell- 
ing business,  fully  equipped  for  its  local  market,  extends  its 
operations  to  cover  a  state,  its  business,  its  facilities,  its  capital, 
must  grow  larger.  If  it  is  to  cover  nations,  it  must  be  larger 
still.  These  plain  facts  simply  buttress  the  holdings  by  courts 
that  the  normal  and  necessary  expansion  of  business  to  any  size 
is  not  forbidden  by  the  Sherman  Law,  unless  such  expansion  is 
accompanied  or  accomplished  by  an  undue  restraint  or  obstruction 
of  trade. 

Turning,  then,  to  this  foreign  trade,  we  find  that  in  1901  the 
Steel  Corporation  did  a  foreign  trade  of  ^31,000,000,  and  in 
191 1  of  $91,000,000.  This  was  90  per  cent  of  the  foreign  iron 
and  steel  trade  of  the  country.  On  the  one  hand,  it  is  charged 
that  this  foreign  trade  was  acquired  by  violation  of  the  Sherman 
Act ;  on  the  other,  that  it  is  the  normal  and  natural  result  of 
lawful  business,  commercial  foresight  and  persistent  effort. 
To  determine  these  contentions  from  the  evidence,  we  now  ad- 
dress ourselves.  Of  the  purpose  of  this  corporation  to  create 
and  possess  this  foreign  trade,  there  can  be  no  question.  So 
that,  if  it  was  illegally  done,  the  company  cannot  escape  the 
legal  consequences.     Its  avowed  purpose  to  enter  into  and  ac- 


142  TRUSTS,    POOLS   AND    CORPORATIONS 

quire  foreign  trade  in  iron  and  steel  is  shown  by  the  corpora- 
tion's own  proofs.  Indeed,  in  outlining  the  plan  and  scope  of 
the  operations  of  the  Steel  Company,  whose  formation  he  was 
then  advocating,  its  first  president  says  : 

I  enlarged  and  perhaps  made  a  more  strenuous  talk  to  Mr.  Morgan 
upon  the  subject  of  export,  and  our  ability  to  export,  and  foreign  busi- 
ness in  foreign  markets,  than  any  other,  excepting  only  the  economic 
advantages  to  be  derived. 

The  fact  that  the  development  of  the  foreign  trade  neces- 
sitated a  wide  diversity  of  products,  that  this  product  diversity 
was  to  be  obtained  by  the  Federal  Steel  Company  acquiring  a 
number  of  mills  making  such  diversity  of  products  and  com- 
pletely integrating  itself,  is  shown  by  the  proofs. 

And  that  such  foreign  trade  demanded  such  wide  diversity 
of  products  as  could  only  be  supplied  by  a  company  which  was 
broadly  integrated  to  manufacture  such  diversified  supplies  is 
shown  by  the  proofs.  In  that  regard,  a  witness  of  long  experi- 
ence in  foreign  trade  says  : 

Q.  What  is  the  nature  of  your  customers  in  foreign  countries  ?  Do 
you  sell  merchants  or  directly  to  consumers,  or  both  ? 

A.    We  sell  to  merchants,  consumers,  and  manufacturers. 

Q.  Is  there  any  advantage  in  selling  to  merchants  to  have  a  diver- 
sified line  of  product  ? 

A.  A  great  advantage.  That  is  the  reason  why  we  have  been  able 
to  develop  our  business,  because  we  could  offer  them  a  diversified 
line  of  products  from  one  source. 

Q.  From  your  knowledge  of  the  business  and  of  the  way  it  is  done, 
what  would  you  say  as  to  whether  or  not  the  different  constituent 
members  of  the  Steel  Corporation  could  all  together  have  developed 
such  a  foreign  trade  as  has  been  developed  by  the  corporation,  if  they 
had  remained  separate  and  distinct  ? 

A.  It  would  have  been  utterly  impracticable  or  impossible.  We 
had  had  an  exemplification  of  that  at  the  Pittsburgh  Wire  Company, 
where  we  were  obliged  to  confine  our  exports  to  two  or  three  differ- 
ent products,  because  of  the  necessity  of  having  facilities  to  deal  with 
certain  lines  of  business.  .   .  . 

Q.  Take,  for  instance,  the  American  Steel  &  Wire  Company,  as 
an  economic  proposition,  as  a  business  proposition  ;    will    you  state 


COMBINATION    IN    THE   STEEL   INDUSTRY  143 

whether  or  not  it  would  have  been  feasible,  or  possible^  for  the 
American  Steel  &  Wire  Company  to  maintain  agencies  iiithe  various 
countries  as  stated  on  Exhibit  39  ? 

A.    It  would  have  been  impossible  owing  to  the  cost. 

Q.  What  would  be  the  fact  as  to  the  Carnegie  Steel  Company  in 
all  these  countries  ? 

A.  The  same  thing  would  apply  to  the  Carnegie  Steel  Company, 
even  to  a  greater  extent  because  of  the  character  of  their  product, 
which  is  not  as  widely  consumed  as  wire  products  and  sheet  steel 
products,  and  some  of  those  others  except  in  the  case  of  some  coarse 
products. 

Q.  What  influence,  if  any,  does  the  offering  of  one  class  of  steel 
products  have  on  the  sale  of  another  ? 

A.  In  the  export  markets,  we  say  that  one  product  sells  another ; 
that  is,  by  having  the  great  range  of  products,  the  buyer  has  an  oppor- 
tunity to  order  practically  all  of  his  requirements.  Frequently  these 
people  will  charter  their  own  sailing  vessels  and  load  them  themselves. 
They  want  to  buy  everything  they  can. 

That  this  is  a  correct  business  estimate  of  the  demands  of  the 
foreign  market  is  corroborated  by  the  testimony  of  the  president 
of  probably  the  most  widely  diversified  range  of  finished  steel 
products  company  in  this  country,  who  says : 

Q.  In  what  way  has  your  ability  to  carry  on  a  foreign  business 
been  affected  by  the  fact  that  you  have  a  full  line  consisting  of  many 
kinds  of  edge  tools  and  cutlery  ? 

A.    Without  that,  we  would  have  practically  no  business  abroad. 

Q.    Why  is  that  ? 

A.  Because  no  one  line  or  one  item  in  the  line  would  be  sufficient 
to  interest  the  foreign  buyers.  It  is  the  completeness  of  the  line 
under  one  brand  and  one  uniform  quality  that  they  seem  to  take  an 
interest  in. 

Q.    That  is,  they  buy  full  lines  of  you,  do  they  ? 

A.   Yes,  sir. 

Of  the  fact  that  this  policy  of  foreign  trade  expansion  was  as 
such  entered  into  by  the  company  and  has  since  been  pursued, 
the  proofs  are  full.  A  most  experienced  man  of  one  of  its  con- 
stituent companies,  the  American  Steel  &  Wire  Company,  and 
who  had  developed  its  foreign  wire  business,  was  given  absolute 
charge  of  the  development,  along  the  lines  previously  advocated, 


144  TRUSTS,    POOLS   AND    CORPORATIONS 

of  all  the  exjDort  business.  In  1903,  the  Products  company,  a 
subsidiary  of  the  Federal  Steel  Company,  was  created  for  that 
express  purpose.  A  systematic  plan  was  pursued  of  establish- 
ing foreign  distributing  warehouses  and  of  building  up  new 
freight  lines  and  shipping  facilities.  It  will  thus  appear  that, 
whatever  may  be  the  legal  consequences  of  the  acquisition  of 
this  great  volume  of  foreign  trade,  there  can  be  no  doubt  of  the 
fact  that  it  was  acquired  by  this  company  in  pursuance  of  a 
well-understood  purpose.  The  proofs  also  show  that  the  diver- 
sified products  of  the  Steel  Corporation,  the  location  of  its  plants 
for  export  manufacture,  and  its  facilities  generally,  are  the  means 
by  which  this  trade  has  been  supplied  and  built  up.  And  they 
also  disclose  the  fact  that  the  different  subsidiary  finishing  com- 
panies of  the  Steel  Corporation  were,  among  other  things,  chosen 
and  acquired  by  that  company  with  a  view  to  developing  the 
very  foreign  trade,  which  has  since  been  acquired.  Such  being 
the  case,  it  logically  follows  that,  if  the  possession  of  this  great 
volume  of  foreign  trade  is  illegal  as  a  monopoly  or  restraint  of 
trade,  the  Steel  Corporation,  of  which  the  Products  company 
is  the  mere  agent,  is  also  a  violator  of  the  Sherman  Law.  Was 
then  this  foreign  business  acquired,  on  the  one  hand,  through 
illegal  methods  by  the  Steel  Corporation  monopolizing  or  at- 
tempting to  monopolize,  or  to  restrain  foreign  trade  ?  Or  was 
it,  on  the  other  hand,  the  result  of  lawful  and  fair  means  to 
expand  and  increase  American  foreign  steel  and  iron  trade  with- 
out driving  out  those  who  were  in  such  foreign  steel  trade,  or 
without  preventing  those  who  wanted  to  enter  it  from  doing  so  ? 

We  have  already  seen  that  when  the  Steel  Corporation  en- 
tered this  field  there  practically  was  no  existing  foreign  steel 
trade  held  by  American  steel  manufacturers.  We  have  seen 
the  opposition  existing  in  such  foreign  markets  to  the  building 
up  of  such  trade  by  a  newcomer ;  we  have  seen  that  the  mar- 
kets of  practically  all  the  principal  nations  of  Europe  were 
tariff  closed  to  American  steel,  and  that  the  spasmodic  dump- 
ing policy  theretofore  pursued  by  American  steel  manufacturers 
had  created  a  prejudice  against  American  trade  which  had  to 
be  overcome. 

It  took  the  Steel  Company  one  or  two  years  to  get  the  foreign 


COMBINATION    IN   THE   STEEL   INDUSTRY  145 

business  started.  It  was  necessary  to  establish  and  maintain 
a  series  of  large  warehouses  all  over  the  commercial  world. 
Space  forbids  details,  but  the  proof  shows  that  nearly  300  places 
of  business  have  been  established  in  60  different  countries  and 
in  all  parts  of  the  world,  and  that  great  warehouses  or  distribut- 
ing stations  have  been  opened  at  strategic  distributing  steam- 
ship centers.  Taking  Belgium,  for  example :  It  was  a  great 
manufacturing  country  ;  it  had  a  tariff  and  90  per  cent  of  its 
manufactured  product  was  exported.  Consequently,  there  was 
no  market  for  the  Steel  Company  there,  except  street  car  rails. 
But  notwithstanding  there  was  practically  no  Belgian  market 
for  foreign  steel,  the  Steel  Company  located  a  large  warehouse 
at  Antwerp  in  which  it  stored  10,000  tons  of  steel  products, 
principally  pipe.  It  was  compelled  to  do  this,  because  from 
Antwerp  it  was  able  to  reach  trading  centers  it  could  not  reach 
direct  from  the  United  States.     In  that  regard,  the  proof  is  : 

We  have  shipping  opportunities  at  Antwerp  that  do  not  exist  in 
this  country.  Antwerp  is  a  great  distributing  point ;  a  large  number 
of  sailing  vessels  go  to  ports  in  the  world  that  are  not  reached  by 
steamers. 

In  the  same  way,  while  the  Austrian  tariff  shut  the  Steel  Cor- 
poration out  of  that  country,  it  established  a  warehouse  at 
Trieste,  Austria,  by  reason  of  the  fact  that  wire  products  and 
pipe  can  be  transshipped  at  Trieste  to  ports  on  the  Adriatic, 
Syria  and  the  Mediterranean.  In  the  same  way,  the  Steel 
Company  established  a  warehouse  depot  at  Vancouver,  British 
Columbia,  through  which  it  furnished  light  rails  for  lumber 
camps,  sheet  iron,  wire  goods  and  pipe.  The  building  up  of 
trade  with  British  Columbia  exempHfies  that  the  steel  trade 
acquired  there  was  not  by  the  Steel  Company  restraining  or 
monopolizing  an  existing  foreign  trade,  but  was,  by  its  creating 
a  new  and  nonexistent  foreign  trade,  in  the  face  of  serious  ob- 
stacles. To  reach  Vancouver,  the  Steel  Corporation  was  con- 
fronted by  a  railroad  freight  rate  from  Pittsburgh  to  Vancouver 
of  $18  per  ton,  while  the  English  steel  manufacturer  could  reach 
Vancouver  on  already  established  lines  of  steamers  from  Liver- 
pool to  Vancouver  at  $7  per  ton.  When  his  steel  reached  Van- 
couver, the  EngHsh  manufacturer  paid  one  third    less   of   the 


146  TRUSTS,    POOLS   AND   CORPORATIONS 

preferential  Canadian  tariff  than  the  American  manufacturer. 
The  result  of  these  adverse  conditions  was  that,  after  the  Steel 
Company  opened  its  warehouse  at  Vancouver,  it  found  that  it 
was  impossible  to  do  much  business  unless  the  Steel  Company 
itself  established  a  line  of  its  own  steamers  from  New  York  to 
Vancouver,  through  the  Straits  of  Magellan.  The  Products 
company  itself,  accordingly,  started  such  a  line,  which  is  the 
only  one  from  New  York  to  Vancouver.  It  has  four  steamers 
of  its  own  in  service  and  two  chartered  vessels.  These  vessels 
call  en  route  at  many  ports  on  the  west  coast  of  South  America 
and  Mexico,  at  some  ports  which  have  no  regular  steamship 
line.  In  addition  to  carrying  the  products  of  the  Steel  Cor- 
poration, they  have  "  been  carrying  considerable  quantities  of 
material  for  other  manufacturers  in  this  country  who  had  been 
unable  to  develop  a  business  because  of  the  lack  of  facilities." 
In  order  to  obtain  return  freight  for  their  steamers,  the  Products 
company  has  to  load  them  at  Vancouver  with  lumber  or  coal 
for  the  Gulf  of  California ;  there  they  reload  with  copper 
matte  for  Dunkirk,  France ;  and  in  France  they  take  on  chalk 
for  New  York.  The  whole  triangular  trip  occupies  from  seven 
to  eight  months  and  shows  the  hitherto  unused  methods  and  the 
continuous  sustained  effort  that  must  be  made  to  get  and  hold 
foreign  trade.  By  like  effort  trade  suited  to  the  varied  needs  of 
various  countries  has  been  built  up.  Thus  distributing  ware- 
houses have  been  established  at  Johannesburg,  South  Africa,  at 
Sydney,  Australia,  in  New  South  Wales,  Copenhagen,  Denmark, 
Barcelona,  Spain,  Singapore,  Straits  Settlements,  Valparaiso, 
Callao,  Buenos  Ayres,  Rio  Janeiro,  and  other  parts  of  the  world 
to  the  number  of  40.  These  warehouses  are  stocked  with  light 
rails  for  mines,  corrugated  iron  for  building,  tin  plate,  wire 
products,  pipe,  and  pretty  nearly  everything  the  Steel  Company 
makes,  except  railroad  rails.  The  steel  for  South  America  is 
carried  by  shiploads  in  chartered  vessels ;  the  Products  com- 
pany having  under  charter,  when  this  testimony  was  taken  in 
191 3,  some  thirty-five  vessels  carrying  cargoes  to  all  parts  of  the 
world.  Permanent  and  extensive  bureaus  are  maintained  at 
London  and  at  Paris,  in  order  to  sell  from  there  to  the  English 
and  French  Colonial  possessions,  buyers  for  which  possessions 


COMBINATIOiN    IN    THE   STEEL   INDUSTRY  147 

gather  at  the  two  cities  named.  The  necessity  for.„.siistained 
continuous  effort  is  shown  by  the  proofs.  For  example,  the 
Products  company  has  a  general  steel  trade  in  the  Argentine 
Republic  of  six  miUions  a  year,  consisting  of  wire  products,  sheet 
steel,  tin  plate,  rails,  structural  material,  street  railway  material, 
etc.  Taking  the  item  of  structural  steel,  the  proofs  show  the 
continuous  means  by  which  such  trade  is  obtained  and  held. 
The  company  located  a  resident  engineering  force  there,  de- 
signed and  built  in  Buenos  Ayres  the  first  steel  structural  build- 
ing in  South  America,  and,  as  a  result  of  the  maintenance  of 
such  a  permanent  engineering  force  there,  has  built  every  steel 
structure  in  Buenos  Ayres,  and  "we  have  maintained  a  very 
large  office  there.  We  are  building  a  number  of  government 
buildings  there.  We  built  all  the  buildings  of  the  Buenos  Ayres 
Exposition.  We  built  one  for  the  Argentine  government  and 
one  for  the  United  States  government  for  their  exhibits  there." 
A  similar  trade  of  diversified  articles  amounting  to  four  miUions 
has  been  built  up  through  agencies  in  four  principal  commercial 
centers  in  China,  and  a  trade  of  five  millions  in  Cuba.  As 
evidencing  that  the  foreign  trade  was  largely  newly  created  in- 
stead of  taken  from  others,  reference  may  be  made  to  the  trade 
built  up  in  Black  Sea  territory.  The  steel  sheets,  pipe,  and  wire 
products  from  the  American  Sheet  &  Tin  Plate,  the  American 
Steel  &  Wire,  and  the  National  Tube  Companies  were  at  first 
sent  to  Hamburg  and  there  transshipped.  The  building  up  of 
that  trade  by  the  Steel  Company  has  caused  the  establishment 
of  a  direct  line  sailing  every  six  weeks  from  New  York  to  the 
Mediterranean,  for  which  the  Products  company  furnished  the 
nucleus  of  each  cargo,  viz.,  from  3,000  to  5,000  tons,  but  which 
afford  shipping  facilities  to  American  manufacturers  of  all  kinds 
of  products.  In  the  same  way,  sustained  trade  of  six  millions  a 
year  has  been  developed  in  Japan.  This  trade  consists  in  pipe, 
railway  material,  structural  bridge  steel,  light  gauged  steel,  tin 
plate,  and  street  railway  material,  in  all  to  the  extent  of  25,000 
tons  per  month.  In  addition  to  using  the  regular  steamer  line, 
three  or  four  vessels  chartered  by  the  Steel  Corporation  carried 
out  entire  cargoes  each  month  from  New  York  to  Japan  of 
the  varied  products  of  the    Carnegie    Steel    Company,  Amer- 


148  TRUSTS,    POOLS   AND   CORPORATIONS 

ican  Steel  &  Wire,  American  Bridge,  American  Sheet  & 
Tin  Plate,  National  Tube,  and  Lorain  Steel  companies,  re- 
spectively. 

We  have  cited  the  above  comparatively  few  foregoing  proofs 
to  illustrate  the  Steel  Company's  foreign  trade,  to  exemplify 
its  own  continuous  and  indefatigable  efforts  to  build  up  this 
trade  on  legitimate,  commercial  lines,  and  not  by  trade  restraint 
or  monopoly  at  the  expense  of  its  competitors.  It  has  been 
the  creation  of  a  new  American  foreign  trade,  and  not  the 
monopolistic  seizure  of  a  preexisting  American  foreign  trade. 
Space  constrains  us  to  go  into  the  extent  of  territory  and  varying 
character  of  that  trade,  the  varied  and  individual  requirements 
that  had  to  be  met  in  different  markets,  all  of  which  show  con- 
clusively that  the  dumping,  spasmodic  foreign  trade  practices  in 
vogue  in  the  steel  trade  at  the  close  of  the  last  century  were  at 
variance  with  the  building  up  of  dependable  foreign  trade,  and 
that  with  the  Steel  Corporation  has  come  the  substitution  of 
reasonable,  sound,  and  successful  commercial  practices  in  which 
and  by  which,  under  the  proofs  in  this  record,  a  dependable 
foreign  steel  trade  can  alone  be  built  up.  All  these  proofs, 
facts,  and  results  serve  to  justify  our  conclusion,  which  we  find 
as  a  fact,  that  this  foreign  trade  of  the  Steel  Corporation  has 
not  been  gained  by  monopoly  and  is  not  a  monopoly  ;  that  it 
does  not,  and  has  not,  restrained  trade ;  but,  on  the  contrary, 
others  in  the  steel  trade  have  been,  at  the  same  time,  free  to 
enter  such  foreign  trade  and  have  done  so  to  the  extent  of  their 
resources.  From  a  business  viewpoint,  the  matter  is  well  summed 
up  by  an  experienced  business  man,  produced  by  the  government, 
who,  speaking  of  the  wire  and  nail  business  with  which  he  was 
familiar,  and  of  the  export  business  of  the  Steel  Company,  says: 

I  would  say  that  it  is  the  magnificent  organization  of  the  export 
department  of  the  Steel  Corporation  which  accounts  for  their  success 
to  a  large  extent.  In  every  country  in  the  world  they  meet  the  con- 
ditions ;  for  instance,  they  have  to  have  different  gauges  in  different 
countries  and  different  size  kegs.  In  Japan  there  is  a  unit  there  which 
is  different  from  elsewhere.  Ours  is  a  keg  of  loo  pounds,  but  theirs  is 
a  keg  of  133  pounds.  Now,  to  know  how  to  reach  all  the  different 
countries  and  supply  the  needs  according  to  the  circumstances  and 


COMBINATION    IN    THE   STEEL   INDUSTRY  149 

give  them  prices,  and  so  on,  in  their  own  money,  or  it  may  be  in 
English  money,  it  is  their  wonderful  organization  that  enalDtes  them  to 
reach  out  as  they  do. 

Q.  So  the  organization  of  the  United  States  Steel  Products  Com- 
pany, which  handles  the  foreign  business,  is  a  very  valuable  thing  for 
the  steel  trade  of  this  country,  is  it  not  ? 

A.    Absolutely  so.     It  is  a  wonderful  organization. 

Bearing  on  the  systematic  organization  thus  referred  to,  the 
proof  is,  in  substance,  as  follows  : 

The  managers  of  these  large  offices  in  foreign  countries  are  almost 
entirely  American,  and  nearly  all  of  them  have  been  trained  in  our 
offices  here.  We  have  a  civil  service  system  in  our  business,  and  our 
men  are  promoted  from  one  office  to  another  according  to  their  aptitude 
for  business  in  certain  countries.  One  man  might  be  a  good  business 
man  in  Brazil,  and  might  be  a  total  failure  in  Australia. 

As  showing  that  this  foreign  trade  has  been  built  up  on  busi- 
ness executive  effort,  we  may  here  refer  to  the  facts  later  noted, 
namely,  the  very  material  decrease  in  the  cost  of  selling  and  the 
very  material  increase  in  the  prices  obtained.  And  in  that  con- 
nection, namely,  the  increase  in  price  obtained  for  goods  sold 
abroad,  and  the  decrease  of  price  for  goods  sold  in  the  United 
States,  the  proof  shows  the  important  fact,  namely,  that  this 
foreign  trade  has  not  been  built  up  at  the  expense  of  the  home 
market.  Without  entering  into  the  details  of  that  exhibit,  it 
suffices  to  say  that  some  80  steel  or  wire  products  are  there 
listed,  all  of  which  have  been  sold  at  materially  higher  prices  in 
the  foreign  than  the  same  articles  were  being  sold  for  in  the  home 
market.  We  find  in  that  list  such  important  and  widely  used 
articles  as  tin  plate,  structural  steel,  blooms,  billets,  and  slabs, 
axles  and  steel  wheels,  plates,  bars,  and  hoops,  T-rails,  pig  iron, 
black  and  galvanized  pipe,  seamless  tubes,  horseshoes,  wires  of 
all  kinds,  nails  and  spikes,  fences,  bale  ties  —  for  all  of  which 
higher  prices  were  charged  and  obtained  in  the  foreign  market 
than  those  paid  by  the  domestic  consumer.  In  connection  with 
that  exhibit,  we  note  the  testimony  of  W.  E,  Corey,  who  says 
that,  during  the  time  he  was  president  of  the  corporation  : 

The  Products  company  had  become  so  well  established  and  had 
worked  up  such  a  line  of  customers  and  trade  conditions  in  the  world 


ISO  TRUSTS.    POOLS  AND   CORPORATIONS 

were  such  that  as  high  prices  were  netted  to  the  mills  on  foreign  busi- 
ness as  on  domestic,  and  on  some  occasions  were  higher  on  certain 
contracts. 

It  will  thus  be  seen  that  the  significant  factor  in  the  view^  of 
the  experienced  witness  quoted  above  is  in  the  Products  company 
ascertaining,  meeting,  and  supplying  the  individual  need  of  in- 
dividual foreign  markets.  And,  as  emphasizing  his  illustration 
of  a  different  nail  keg  unit  in  Japan,  as  the  basis  of  doing  busi- 
ness, it  might  be  added  that  to  gain  a  foothold  in  the  trade  of 
India  another  unit  was  demanded,  for  the  proofs  show  that  in 
India  the  keg  unit  does  not  prevail  at  all ;  that  there  the  nail 
unit  is  a  seven-pound  package  of  nails  in  paper  packages,  which 
are  put  up  in  such  package  at  the  nail  mill  at  Allentown,  Pa.,  a 
seaboard  plant,  which  was  acquired  with  the  American  Steel  & 
Wire  Company.  In  the  same  way  the  proofs  show^  the  markets 
of  Australia  demand  an  oval  nail,  while  in  Java  a  round  one  is 
required.  Indeed,  the  absolute  necessity  of  making  different 
goods  for  the  foreign  markets  from  those  made  for  home  trade 
is  illustrated  by  the  proofs  of  the  large  expense  necessarily  in- 
curred to  meet  these  local  foreign  requirements. 

A  patient  study  of  the  proofs  of  actual  business  facts,  diffi- 
culties, and  efforts  shown  in  the  testimony  of  experienced  business 
men  leads  us  to  these  conclusions : 

First,  that  the  foreign  business  in  steel  and  iron  done  by  the 
Steel  Corporation  has  increased  from  290,000  tons  in  1903  to 
about  2,260,000  tons  in  1912,  and  in  value  from  531,000,000  in 
1904  to  391,000,000  in  191 3. 

Second,  that  the  Steel  Corporation  normally  does  from  80  to 
90  per  cent  of  the  foreign  iron  and  steel  business  of  the  United 
States;  that  its  exports  of  $91,000,000  in  191 3  include 
$30,000,000  of  "reexport"  business,  so  called,  which  it  does  in 
connection  with  other  American  manufacturers  using  its  basic 
products;  that  the  "reexport"  business  in  connection  with  other 
companies  gave  employment  to  from  15,000  to  18,000  men,  and 
the  foreign  business  of  the  Steel  Corporation  to  40,000  men. 

Third,  that  its  competitors  in  the  iron  and  steel  business,  with 
some  few  exceptions,  do  not  seek  to  enter  the  foreign  market, 
so  long    as   they  can  get  a  market  at  home,  and  what  foreign 


COMBINATION    IN   THE    STEEL    INDUSTRY  151 

steel  business  there  was  prior  to  1901  had  been^^mall,  and 
generally  not  profitable,  and  was  done  at  from  7  per  cent  to 
1 1  per  cent  expense  on  invoice. 

Fourth,  that  the  success  of  the  Steel  Company  in  building  up 
this  continuous  foreign  trade  primarily  consisted  in  its  mechani- 
cal ability  to  make  the  wide  range  and  variety  of  product  re- 
quired by  foreign  markets  and  in  its  manufacture  of  such 
diversified  products  at  plants  properly  located  for  export  trade. 
In  that  connection  reference  might  be  made  to  the  proof,  as 
showing  how  essential  to  the  maintenance  of  foreign  trade  is 
the  diversity  of  product  which  comes  from  broad  integration : 

Q.  Can  a  manufacturer  ha\-ing  a  large  line  of  products  for  sale 
afford  to  maintain  such  warehouses  and  conduct  that  business,  when 
a  person  manufacturing  only  one  Une  of  goods  could  not  afford  to  do  it  ? 

A.  It  was  tried  by  the  National  Tube  Company  before  the  forma- 
tion of  the  Steel  Corporation.  They  established  a  large  warehouse  at 
Johannesburg,  South  Africa,  and  were  obhged  to  abandon  it  for  two 
reasons,  one  because  of  the  cost  of  doing  business.  It  cost  them  over 
8  per  cent  to  do  the  business,  because  they  had  one  Une  of  goods  to 
sell  only. 

Fifth,  in  gradually  reducing  its  own  overhead  cost  of  foreign 
selling,  from  about  3^  per  cent  in  1901  to  8  per  cent  in  191 1. 

Sixth,  in  gradually  increasing  the  price  of  such  of  its  product 
as  was  sold  in  the  foreign  market  from  1904,  when  the  trade 
had  gotten  under  way,  to  1912,  while  it  was  at  the  same  time 
gradually  decreasing  the  price  of  its  product  as  was  sold  to  con- 
sumers in  the  home  market.  These  relative  changes  are  shown 
by  defendant's  Exhibit,  as  follows  :  In  1904  the  Steel  Corporation 
sold  such  of  its  product  as  it  exported  at  an  average  price  of 
$27.22  per  gross  ton;  by  1912  it  was  able  to  market  them  at 
$34.24.  During  the  same  period  it  was  in  1904  receiving  for 
such  of  its  product  as  was  sold  in  the  home  market  an  average 
of  $41.44  per  gross  ton;  by  19 12  this  price  was  reduced  to  $36.53. 

With  these  facts,  figures,  and  results  proved  in  this  record, 
we  are  warranted  in  holding  that  the  foreign  trade  of  the  Steel 
Corporation,  its  mode  of  building  it  up,  and  its  retention  when 
built  up  are  not  contrary  to  the  Sherman  Law.  To  hold  other- 
wise would  be,  practically  and  commercially,  to  enjoin  the  steel 


152  TRUSTS,    POOLS   AND   CORPORATIONS 

trade  of  the  United  States  from  using  the  business  methods 
which  are  necessary  in  order  to  build  up  and  maintain  a  depend- 
able business  abroad,  and  if  the  Sherman  Law  were  so  construed, 
it  would  itself  be  a  restraint  of  trade  and  unduly  prejudice  the 
public  by  restraining  foreign  trade.  Happily,  it  is  open  to  no 
such  charge,  for,  as  the  Supreme  Court  in  the  Standard  Oil  case 
said:  "One  of  the  fundamental  purposes  of  the  statute  is  to 
protect,  not  to  destroy,  rights  of  property." 

Seeing,  then,  the  Steel  Corporation,  at  the  time  this  petition 
was  filed,  was  engaged  in  the  natural  and  normal  conduct  of 
business,  both  home  and  foreign,  and  that  it  was  not  then 
monopolizing,  restraining,  or  attempting  to  monopolize  or  re- 
strain, trade  in  iron  and  steel  between  the  states  or  with  foreign 
nations,  we  next  turn  to  1901,  the  year  the  corporation  was 
formed,  and  address  ourselves  to  the  inquiry  whether  it  was 
formed  in  order  to  so  monopolize  or  restrain  trade;  or,  to  use 
the  test  fixed  by  the  Supreme  Court,  was  the  Steel  Company, 
when  created,  a  combination  which  by  its  intent  was  meant  to,  or 
by  the  inherent  nature  of  its  contemplated  acts  would,  "preju- 
dice the  public  interests  by  unduly  restricting  competition  or 
unduly  restraining  the  course  of  trade  "  .''  Now,  what  is  meant 
by  the  phrase  "  the  inherent  nature  of  its  contemplated  acts," 
which  violate  the  statute  when  an  illegal  combination  is  originally 
formed,  and  which,  continuing,  because  inherent  elements 
warrant  its  dissolution  whenever  questioned,  is  illustrated  by 
what  was  found  to  be  the  fact  in  the  Standard  Oil  case.  There 
the  court  based  its  right  and  duty  to  dissolve  the  Standard  Oil 
Company  on  the  two  facts  that :  First,  the  Standard  Oil  Com- 
pany destroyed  the  " potetttiality  of  competition'" ;  and,  second, 
that  it  was  "a  monopolization  bringing  about  a  perennial  violation 
of  the  second  section  of  the  act."  And  that  there  was  in  the 
Standard  Oil  Company  of  New  Jersey  a  destruction  of  the 
power  to  compete  —  the  potentiality  of  competition  —  and  a 
perennial,  continuous,  and  perpetual  violation  of  the  law  was 
shown,  in  the  court's  estimate,  by  the  following  state  of  facts  : 

{a)  Because  the  unification  of  power  and  control  over  petroleum 
and  its  products  which  was  the  inevitable  result  of  the  combining  in 
the  New  Jersey  corporation  by  the  increase  of  its  stock  and  the  transfer 


COMBINATION    IN   THE   STEEL   INDUSTRY  153 

to  it  of  the  stocks  of  so  many  other  corporations,  aggrega^ig  so  vast 
a  capital,  gives  rise,  in  and  of  itself,  in  the  absence  of  countervailing 
circumstances,  to  say  the  least,  to  the  prima  facie  presumption  of 
intent  and  purpose  to  maintain  the  dominancy  over  the  oil  industry, 
not  as  a  result  of  normal  methods  of  industrial  development,  but  by 
new  means  of  combination  which  were  resorted  to  in  order  that  greater 
power  might  be  added  than  would  otherwise  have  arisen  had  normal 
methods  been  followed,  the  whole  with  the  purpose  of  excluding  others 
from  the  trade,  and  thus  centraUzing  in  the  combination  a  perpetual 
control  of  the  movements  of  petroleum  and  its  products  in  the  channels 
of  interstate  commerce. 

At  this  point  we  deem  it  proper  to  specially  note  these  vitally 
important  terms  used  by  the  Supreme  Court,  viz.,  the  destruc- 
tion of  "the  potentiality  of  competition,"  and  the  "perennial 
violation  "  of  the  statute.  For,  when  it  comes  to  the  question 
of  the  dissolution  of  the  combination,  and  that  is  the  phase  of 
this  case  we  are  now  considering,  a  dissolution  must  be  decreed 
whenever  the  inherent  nature  of  its  contemplated  acts  is  such 
that  from  its  very  nature  the  combination  was  bound  to  destroy 
"the  potentiality  of  competition,"  and  these  violations  were, 
from  its  inherent  nature,  bound  to  be  perennial.  In  other  words, 
the  Standard  Oil  Company  had  to  be  dissolved  because  its  in- 
herent nature  was  such  that  it  was  bound  to  destroy  the  power 
to  compete  in  petroleum,  and  it  would  not  be  heard  to  say  that 
it  had  no  intent  to  destroy  competition  when  its  inherent  nature 
had  made  it  do  so.  It  therefore  follows  that,  if  such  destruction 
of  the  power  of  competition  and  that  by  perennial  violation  thus 
evidenced  the  original  inherent  illegal  nature  of  the  combination, 
it  would  seem  that  if  a  long  series  of  years  had  not  resulted  in 
a  combination  either  destroying  actual  competition  of  others,  or 
of  their  power  to  compete,  or  had  not  resulted  in  the  long  years 
of  the  combination's  business  in  constant,  perennial  violations 
of  law,  it  could  not  reasonably  be  held  that  the  inherent  original 
nature  of  such  combination  was  such  as  to  make  it  unlawful 
when  originally  created  and  liable  to  dissolution  whenever  after- 
wards challenged.  On  the  contrary,  it  would  seem  that  the  acts 
of  a  combination  are  fair  tests  of  the  real  inherent  nature  of  the 
combination,  and  that  in  such  case  the  time-tried  rule,  "  By  their 


154  TRUSTS,    POOLS   AND  CORPORATIONS 

fruits  ye  shall  know  them,"  might  well  serve  to  best  gauge  the 
source  or  tree  from  or  on  which  the  fruit  matured.  But,  passing 
by  this  time-tried  rule,  with  its  practical  tests  of  what  the  Steel 
Company  did  in  the  ten  years  subsequent  to  its  creation,  let  us 
address  ourselves  to  the  proofs  of  what  was  done  at  or  about 
the  time  the  Steel  Corporation  was  formed,  and  from  these 
proofs  alone  determine  whether  the  object  of  those  forming  it 
was  to  prejudice  the  public  by  unduly  restricting  competition  or 
unduly  obstructing  the  course  of  trade,  or,  even  if  there  was  no 
such  intent,  was  the  inherent  nature  of  the  Steel  Corporation's 
contemplated  acts  such  as  to  prejudice  the  public  by  unduly 
restricting  competition  or  unduly  obstructing  the  course  of  trade? 
The  iron  and  steel  trade  of  the  United  States  has  been  a 
gradual  sustained  evolution.  So  far  as  the  metallic  base  is  con- 
cerned, such  evolution  may  be  broadly  stated  to  have  been  from 
iron  to  steel,  from  steel  to  Bessemer  steel,  from  Bessemer  to 
open-hearth.  It  is  interesting  to  note  that  the  next  development 
bids  fair  to  be  from  fuel  smelting  to  electric  smelting.  These 
several  stages  of  development  have  been  accompanied  by  an 
abandonment  and  loss  of  equipment  of  great  value,  and  have 
necessitated  vast  further  expenditures  for  new  appliances  to 
make  the  new  open-hearth  steel  product.  To  illustrate,  referring 
to  a  single  one  of  the  rapid  revolutions  in  steel  making — the  re- 
moval of  phosphorus  in  pig  iron  in  the  Bessemer  or  open-hearth 
processes  by  the  substitution  in  the  lining  of  lime  for  a  silicon 
base.  This  single  chemical  fact,  made  public  in  1885,  "prac- 
tically revolutionized  the  iron  industry,  and  by  the  year  1890 
basic  open-hearth  steel  had  practically  supplanted  the  use  of 
wrought  iron  for  all  commercial  purposes."  Side  by  side  with 
these  rapid  metallurgical  changes  of  product  there  was  at  the 
same  time  going  on  radical  changes  in  the  mechanical  handling 
of  the  product.  To  refer  to  but  one  of  the  many  mechanical 
changes,  "in  the  late  8o's  the  introduction  of  electricity  as  a 
motive  power  also  produced  another  revolution  in  the  steel  in- 
dustry, so  that  practically  all  works  had  to  be  rebuilt  if  they  de- 
sired to  keep  abreast  of  the  recent  developments  of  the  art." 
But  not  only  were  metallurgical  and  mechanical  changes  taking 
place  with  regard  to  the  different  stages  of  metal  production, 


I 


COMBINATION    IN   THE   STEEL   INDUSTRY  155 

but  there  developed  at  the  same  time  a  radical  chafrge,  not  of 
one  product  or  one  stage,  but  of  all  stages  in  the  way  of  round- 
ing up  plants,  or,  as  it  is  called,  integration,  so  that  continuous 
processes  could  be  carried  on.  In  the  old  method  of  wrought 
iron  making  there  was  no  continuity  of  operation.  The  molten 
metal  produced  by  a  blast  furnace  was  run  into  pig  iron.  This 
pig  iron  was  transported  to  a  rolling  mill,  where  it  was  first 
puddled,  and  then  rolled  into  muck  bar,  which  was  again  suffered 
to  cool.  The  muck  bar  was  again  heated  and  rolled  in  finishing 
mills.  As  steel  making  progressed,  its  manufacture  by  various 
agencies  not  necessary  here  to  detail,  became  a  continuous  fluid 
process.  Instead  of  the  metal  being  suffered  to  cool,  it  was 
continuously  treated  first  as  a  fluid,  and  then  as  an  ingot,  but 
always  without  entirely  losing  its  initial  heat.  But  these  steel 
plants,  with  their  continuous  processes  and  their  increased  capacity 
to  produce,  serve  to  confront  the  finishing  plants  with  grave  prob- 
lems in  reference  to  their  basic  supplies.  This  era  of  change 
and  its  new  problems  is  testified  to  by  Percival  Roberts,  Jr., 
whose  experience  and  relation  to  the  steel  business  give  weight 
to  his  summary  of  the  changing  conditions  and  problems  con- 
fronting that  industry.     He  testified  : 

I  think  I  had  reached  the  situation  existing  as  of  the  late  8o's  when 
basic  open-hearth  steel  was  gradually,  or  rapidly,  I  might  say,  sup- 
planting wrought  iron.  The  wrought  iron  plants  that  were  of  smaller 
capacity  and  had  insuificient  capital  or  lack  of  sufficient  tonnage  to 
dispose  of  the  product  of  an  economical  steel  plant  commenced  pur- 
chasing billets  and  blooms  from  those  who  had  converted  their  plants 
into  steel-manufacturing  ones.  This  production  of  billets  and  blooms 
was  practically  a  by-product  with  the  finishing  mills.  In  times  of  ac- 
tivity they  had  very  little  surplus  product  to  spare.  When  not  so 
pushed  on  finished  material,  they  disposed  of  part  of  their  steel-melting 
capacity  in  the  shape  of  semifinished  material.  The  iron  plants  pur- 
chasing this  material  found  that  the  same  could  not  be  carried  on  suc- 
cessfully, due  to  the  fact  that  it  required  an  almost  unlimited  capital 
to  be  locked  up  in  supplies  of  billets,  as  finished  material  required  so 
many  different  weights  of  billets  and  blooms  that  the  stock  on  hand 
had  to  be  enormously  large  ;  also  the  chemical  requirements  of  orders 
requires  that  different  grades  of  steel  should  be  used.  This  also  re- 
'  quired  a  vast  amount  of  material  to  be  carried  at  all  times  on  hand. 


156  TRUSTS,    POOLS   AND    CORPORATIONS 

Another  matter  which  occurred  about  that  time  changed  very  materially 
the  situation,  and  that  was  the  introduction  of  what  was  known  as  the 
Jones  mixer.  I  might  say  that  up  to  that  time  the  production  of  all 
blast  furnaces  was  run  out  from  the  furnace  in  the  shape  of  liquid  pig 
iron,  and  cast  in  the  sand  and  allowed  to  become  cool.  The  inven- 
tion of  the  Jones  mixer  was  for  the  purpose  of  carrying  on  the  produc- 
tion of  steel  as  one  continuous  operation  from  ore  to  the  finished 
product,  never  permitting  the  material  to  become  cold  until  it  reached 
the  final  economic  shape.  I  do  not  mean  to  say  that  this  applies  to  all 
finished  shapes,  but  to  a  cross  section  of  material  at  which  it  would  be 
economical  to  let  the  material  cool. 

******** 

The  Jones  mixer  is  a  large  vessel  placed  between  the  blast  furnace 
and  the  steel  works  in  which  the  product  of  the  blast  furnace  is  run  in 
liquid  form,  making  a  large  reservoir  of  fluid  pig  iron  from  which 
ladles  are  taken  in  liquid  condition  the  contents  in  liquid  condition 
and  used  in  Bessemer  converters  or  open-hearth  furnaces.  The  ad- 
vantage of  this  process  was  that  it  reduced  the  cost  of  manufacture  in 
this  one  respect  alone  by  about  $i  a  ton,  which  is  the  cost  of  remelt- 
ing  cold  pig  iron  for  steel  production. 

The  situation  from  1890  on  grew  more  and  more  acute.  Those  con- 
cerns which  had  become  more  or  less  integrated  and  had  changed 
their  methods  from  those  of  iron  to  steel  were  continuing  their  inte- 
gration to  even  a  greater  extent  than  before,  although  I  would  like  to 
say  that  even  prior  to  the  introduction  of  steel  the  matter  of  integration 
was  one  of  varying  degree,  even  in  the  manufacture  of  wrought  iron, 
although  there  was  not  the  same  necessity  for  it.  In  those  days  one 
man  mined  ore  ;  another  man  ran  a  blast  furnace  ;  another  man  oper- 
ated rolling  mills.     The  processes  were  all  disconnected. 

******** 

Coal  and  limestone  were  sometimes  separate,  sometimes  controlled 
by  one  party,  but  even  in  those  days  there  were  certain  establishments 
which  controlled  their  material  from  the  ore  and  limestone  up  to  the 
finished  wrought  iron  product,  so  that  even  in  those  days  iron  manu- 
factures were  not  on  the  same  basis  as  regards  competition.  Those 
concerns  whose  output — I  speak  now  as  of  about  the  year  1890  — 
those  concerns  whose  output  was  of  a  character  and  of  sufficient 
tonnage,  and  who  controlled  sufficient  capital  to  enable  them  to  con- 
vert their  works  from  iron  to  steel,  did  so,  but  there  were  a  vast  number 
of  those  whose  character  of  product  was  of  a  less  heavy  nature,  such 
as  sheets,  small  bars,  light  plates,  etc.,  who  neither  had  the  capital  nor 


I 


COMBINATION    IN   THE   STEEL   INDUSTRY  157 

the  output  to  warrant  them  in  making,  or  rendered  it  possijale  for  them 
to  make,  this  change.  There  was  also  another  class  of  establishments, 
namely,  the  blast  furnaces  who  had  heretofore  supplied  the  puddling 
furnaces  or  the  rolling  mills  with  their  pig  iron  for  making  bars. 
Those  concerns  found  themselves  without  customers  and  they  in  turn 
were  forced  to  develop  a  product  which  would  take  the  place  of  their 
former  ones.  These  smaller  concerns  were  buying,  as  I  say,  to  the 
best  of  their  ability,  their  billets,  blooms,  and  slabs  from  the  larger 
concerns,  who  were  making  them  in  a  certain  sense  as  a  by-product 
during  the  years  from  about  1890  to  1896. 

These  revolutions  which  I  have  spoken  of,  due  to  the  introduction 
of  basic,  open-hearth  steel  in  place  of  wrought  iron,  were  the  funda- 
mental reasons  for  all  the  earlier  aggregations  of  work  which  took  place 
about  the  year  1898,  and  through  that  year  down  to,  say,  1900.  Cer- 
tain of  them  were  integrated  like  the  Federal  Steel  and  the  Carnegie 
Steel  Company  backward  to  their  supplies  of  raw  material,  and  to  the 
extent  which  they  had  formerly  been  consumers,  they  to  that  extent 
became  producers.  The  other  concerns,  like  the  National  Steel,  were 
composed  largely  of  blast  furnaces  that  had  lost  their  custom  for  pig 
iron,  and  who  found  themselves  compelled  to  produce,  instead  of  pig 
iron,  billets  and  blooms  for  sale  to  those  who  had  formerly  used 
wrought  iron.  The  Tin  Plate,  the  Sheet  Steel,  the  Hoop,  the  Ameri- 
can Steel  &  Wire  were  composed  of  concerns  who  individually  were 
neither  able,  for  want  of  capital  or  amount  of  output,  to  change  from 
wrought  iron  or  to  manufacture  steel  in  sufficient  quantities  to  make 
it  commercially  profitable  to  do  so. 

*_*  *  *  *  *  *  * 

The  Tin  Plate  Company  had  been  a  consumer,  and  not  a  producer, 
of  wrought  iron  product,  and,  in  fact,  the  manufacture  of  tin  plate  had 
not  taken  place  in  this  country  until  after  the  introduction  of  the  use 
of  open-hearth  steel.  So  far  as  I  included  them  in  my  answer,  I  meant 
to  state  that  they  individually  were  unable  to  produce  the  raw  material 
from  which  their  finished  product  was  made,  but  by  combining  these 
individual  units  they  would  be  enabled  to  do  so  economically. 

The  tendency  of  the  steel  business  during  these  years  towards 
concentration,  combination,  rounding  up,  or  continuity  of  opera- 
tion is  reflected  in  the  census  figures.  On  the  one  hand  is  un- 
precedented growth  in  the  volume  of  the  steel  and  iron  business 
done  and  of  the  increase  of  capital ;  on  the  other  hand  is  a 
striking  decrease  in  the  number  of  establishments  doing  it. 
Thus  Bulletin  No.  78,  Census  of  Manufacturers,  1905,  says: 


158  TRUSTS,    POOLS  AND   CORPORATIONS 

The  growth  of  steel  production  has  been  the  heaviest  of  any  por- 
tion of  the  iron  and  steel  industry.  The  product  for  1900  shows  a 
gain  over  that  of  1890  of  6,510,348  tons,  or  155.9  %,  or  an  average  in- 
crease of  about  650,000  tons  per  year.  The  product  of  1890  shows  a 
gain  over  that  of  1880  of  3,147,271  tons,  or  306.3  %,  an  average  in- 
crease of  nearly  315,000  tons. 

Whether  the  cause  of  this  enormous  increase  of  production  on 
the  one  hand  was  due  to  the  rounding  up  process,  of  decreasing 
the  number  of  plants,  and  further  expanding  those  that  remained, 
the  bulletin  in  question  is,  of  course,  speculative,  but  does  show 
that  decrease  in  the  number  of  corporate  plants  with  increase  of 
capital  in  those  remaining  was  the  actual  fact  in  the  iron  and 
steel  business.  In  that  regard  the  same  bulletin  showed  that 
there  were  in  1880  in  the  United  States  substantially  1,000  of 
such  establishments  with  a  capital  of  $230,000,000.  By  1890 
these  1,000  had  decreased  to  838,  but  the  capital  of  those  that 
remained  was  increased  to  $425,000,000.  By  1900  the  1,000 
establishments  of  1880  had  again  decreased  to  763,  but  the  capital 
of  those  that  remained  had  grown  to  over  $600,000,000.  Dur- 
ing the  same  period  the  separate  blast  furnace  establishments 
had  also  decreased.  In  1880  they  were  483  ;  in  1890,  377;  and 
in  1900,  273.  This  census  evidence  of  widespread  general 
change,  readjustment,  and  concentration  by  practical  men  in  the 
iron  and  steel  business  would  seem  necessarily  to  have  had  some 
impelling  cause  —  economic,  mechanical,  metallurgical,  or  ad- 
ministrative—  back  of  it.  And,  in  the  absence  of  proof  to  the 
contrary,  the  conclusion  of  Mr.  Roberts  would  seem  reasonable 
that  "  these  revolutions  which  I  have  spoken  of,  due  to  the  in- 
troduction of  basic,  open-hearth  steel  in  place  of  wrought  iron, 
were  the  fundamental  reasons  for  the  earlier  aggregation  of 
works  which  took  place  about  the  year  1898,  and  through  that 
year  down  to  say  1900,"  and  that  the  business  reasons  which  in- 
duced practical  steel  men  to  so  act  was  the  fact  that,  unless  they 
did  so,  the  changed  conditions  of  the  steel  business  might  force 
them  out  of  business. 

This  testimony  serves  to  show  how  radical,  extensive,  and 
enforced  was  the  steel  integration,  which,  summed  up  in  a  few 
terse  words  of  this  business  man,  really  meant  a  rounding  up 


COMBINATION    IN    THE    STEEL   INDUSTRY  159 

and  readjusting  of  everything,  as  the  witness  says,  ^jom  the 
mining  of  the  ore  to  putting  on  the  market  of  the  finished  prod- 
uct," and  an  increase  in  that  company's  case  of  resources  from 
^600,000  to  over  $23,000,000.  From  these  figures  the  insistent 
necessity  of  integration  in  the  steel  business  will  be  seen. 

Coincident  with  these  mechanical  and  metallurgical  changes 
another  basic  change  of  peculiar  and  dominating  importance  in 
the  steel  business  was  also  taking  place.  This  was  in  freight 
and  transportation.  This  change,  it  will  be  seen,  not  only  re- 
stricted the  range  of  a  plant's  market,  but  by  doing  so  neces- 
sitated what  might  be  termed  locality  integration.  The  chief 
factor  in  the  manufacture  of  steel  is  labor,  and  the  next  is  the 
locality  where  it  is  produced  ;  being  of  great  bulk,  the  trans- 
portation of  the  raw  material  to  where  it  is  made  and  the  freight 
to  where  it  is  used  are  the  factors  decisive  of  its  being  profitably 
made  and  sold.  As  illustrative  of  the  vital  character  of  freight 
as  a  factor,  the  proof  is  that  the  Steel  Corporation  uses  45,000 
tons  of  ore  alone  a  day,  not  to  mention  coke  or  limestone.  The 
delivery  of  the  steel  to  the  user,  and  the  net  gain  over  cost  re- 
ceived from  him,  is,  of  course,  the  practical  test  of  steel  making. 
From  these  self-evident  business  truisms,  it  follows  that  the 
tonnage  of  bulky  steel  products  restricts  its  steady,  natural,  and 
sustaining  market  to  the  consumption  of  the  territory  near  its 
place  of  production  ;  for  example,  great  as  is  the  consumption 
of  steel  in  the  New  York  district,  and  ample  as  is  the  productive 
capacity  of  the  United  States  Steel  Corporation  to  supply  it,  yet 
the  proof  is  that  the  Steel  Corporation  does  "  very  little  business 
here  (New  York)  compared  with  that  done  by  the  mills  in 
Bethlehem,  Phoenixville,  and  mills  located  near  here."  Prior  to 
the  regulation  of  freight  rates  by  the  government  through  the 
Interstate  Commerce  Commission,  freight  stability  was  unknown. 
Special  rates  to  large  shippers,  cuts  in  freight  rates,  and  secret 
rebates  were  common  practices  between  the  steel  producers  and 
the  railroads,  and  these  enabled  steel  manufacturers  to  ship 
bulky  products  into  territory  naturally  supplied  by  other  manu- 
facturers, and  by  these  cuts,  special  rates,  or  rebates  to  dump 
their  surplus  product  in  districts  which  they  could  not  enter  if 
they  paid  proper  freight  charges. 


i6o  TRUSTS,    POOLS   AND    CORPORATIONS 

When,  however,  under  the  regulating  power  of  the  govern- 
ment, freight  stability  was  enforced,  the  steel  maker's  market 
was  at  once  locally  restricted,  and  his  only  way  of  overcoming 
the  regular,  stable,  adverse  freight  rate  was  to  integrate  locally ; 
that  is,  to  erect  or  acquire  other  mills  in  the  market  locality  from 
which  freight  forbade  his  heavy  product  entering.  The  em- 
bargo laid  by  freight  on  distant  markets  is  simply  a  business 
fact,  and  it  suffices  to  say  that,  while  the  government  by  this 
enforced  transition  of  the  steel  shipper  from  the  era  of  unstable 
freight  cuts  and  rebates  to  an  era  of  freight  stability  in  the  end 
contributed  to  corresponding  benefit  and  stability  in  the  steel 
maker's  business,  yet  it  must  not  be  overlooked  that,  in  thus 
narrowing  his  market,  the  steel  maker  was  compelled  to  broaden 
his  market  by  expanding  his  operations  so  as  to  manufacture  in 
additional  localities.  Coincident  with  this  tendency  to  integra- 
tion and  to  the  consequent  widening  of  variety  of  product  and  to 
the  entry  of  steel  into  new  fields,  a  radical  change  in  the  variety 
of  ore  supply  was  necessitated.  In  thinking  of  iron  ore,  we  are 
apt  to  regard  it  as  simply  ore,  and  overlook  the  fact  that  there 
is  a  radical  difference  in  different  ores.  In  the  earlier  manu- 
facture of  iron,  practically  any  ore  could  be  used,  but  as  the 
steel  era  came  along  with  its  chemical  tests,  and  the  specified 
requirements  incident  to  its  use  in  varieties  of  articles,  the  par- 
ticular character  of  the  ore  base  became  more  and  more  a 
matter  of  importance.  The  practical  proof  of  this  wide  range  of 
various  ores  required  is  illustrated  in  the  proofs,  which  is  that, 
even  with  the  wide  range  of  ores  owned  by  the  Steel  Company, 
it  is  at  times  unable  to  meet  the  requirements  of  purchasers. 

We  noted  above  where  i8  different  kinds  of  billets  were  re- 
quired in  a  wire  mill  alone.  The  proof  is  that  it  is  only  by  a 
scientific  mixture  of  different  sorts  of  ores  that  steel  of  the  large 
range  of  specified  steel  requirements  can  be  made.  This  simple 
statement  of  a  few  lines,  when  carried  into  practical  business 
operations,  means  the  furnishing  of  many  varieties  of  ores  that 
may  be  as  far  away  from  a  blast  furnace  as  Minnesota,  Chili,  or 
Cuba.  These  must  be  bought,  mined,  transported,  fluxed,  and 
treated  in  order  to  meet,  for  example,  the  exacting  structural  re- 
quirements of  a  steel  rail.     To  successfully  produce  that  rail  in 


COMBINATION    IN    THE    STEEL   INDUSTRY  i6i 

great  tonnage,  which,  under  the  proofs,  is  a  business  jiecessity, 
every  step  in  that  long  spread  from  the  ore  in  the  ground  to  the 
finished  rail  must  be  under  the  integrated  control  of  that  agency 
which  is  ultimately  held  responsible  by  the  railroad  for  the  rail. 

The  result  of  these  radical  and  forced  changes  in  steel  making 
evidenced  itself  in  the  rapid  and  widespread  fever  of  integration 
by  consolidation  that  took  place  toward  the  close  of  the  century. 
Whether,  from  such  consolidations,  monopoly,  rise  in  prices,  and 
restraints  of  trade  were  hoped  by  many  of  their  promoters  to  be 
obtained,  it  is  certain  that  the  deep-lying  motive  which  led  prac- 
tical steel  men  to  put  their  plants  into  such  consolidation  was 
the  recognition  of  the  absolute  business  necessity  of  integration 
as  a  condition  of  staying  in  the  steel  business.  Thus  the  Car- 
negie Steel  Company,  occupying,  as  it  did,  the  commanding 
position  in  the  steel  trade,  varied,  as  were  its  products,  having 
fully  70  per  cent  of  what  foreign  trade  there  was,  and  having 
the  foremost  place  in  the  home  markets,  itself  felt  the  necessity 
of  and  was  preparing  to  enter  on  further  integration  by  widen- 
ing the  variety  of  its  product.  While  leading  in  some  lines,  it 
was  deficient  in  others,  notably  pipe  and  wire,  which  consumed 
much  of  its  basic  products. 

So  also  had  the  Carnegie  Company  determined  to  integrate 
by  adding  the  important  items  of  pipes  to  its  finished  product. 
The  purpose  of  this  was  to  create  for  itself  and  in  itself  a  cus- 
tomer that  would  use  part  of  its  product  by  making  it  into  pipe. 
This  item  of  steel  consumption,  embracing  oil,  gas,  water,  irri- 
gation, and  kindred  fields,  the  Carnegie  Company,  as  we  have 
seen,  did  not  make.  That  this  vast  field  of  basic  steel  consump- 
tion was  not  sufficiently  filled  is  shown  by  the  fact  that  they 
planned  to  spend  in  additions  for  such  pipe  making  mills,  ex- 
cluding land,  $12,000,000.  The  plans  for  this  enterprise  were 
entered  upon  in  1897  or  1898.  It  will  also  be  seen,  in  discussing 
later  the  acquisition  by  the  Steel  Corporation  of  the  Seamless 
Tube  Company,  that  the  Carnegie  people  were  carrying  on  sub- 
stantial experimental  work  at  the  Seamless  Company's  plant 
with  a  view  to  itself  entering  the  tube  field.  Efforts  had  been 
made  to  get  a  site  near  Pittsburgh,  but  sufficient  acreage  for  the 
large  works  in  view  could  not  be  found.     Meanwhile,  a  site  of 


l62  TRUSTS,    POOLS   AND   CORPORATIONS 

5,000  acres  was  secured  at  Conneaut,  on  Lake  Erie,  where  the 
company's  ore  steamers  coming  from  Lake  Superior  delivered 
the  ore  to  the  company's  railroad  for  transit  to  Pittsburgh. 
From  this  point,  water  transportation  for  pipe  was  available  to 
seaboard  and  to  the  entire  territory  tributary  to  the  Great  Lakes. 
The  testimony  is  that  this  proposed  widening  of  the  Carnegie 
Steel  Company's  product  variety  to  include  pipe  and  wire  prod- 
ucts was  absolutely  "  in  good  faith  as  indicative  of  the  intention 
and  purposes  of  the  Carnegie  Steel  Company." 

As  evidencing  not  only  that  fact,  but  that  it  was  a  necessary 
and  far-sighted  integration  (one  called  for  by  the  legitimate 
future  of  the  business),  will  appear  from  the  fact  that,  after  the 
Steel  Company  was  formed  and  its  comprehensive  plan  of 
complete  integration  was  carried  out,  that  company  expended 
$13,000,000  in  building  the  pipe  plant  which  the  Carnegie  com- 
pany in  1900  planned  to  build,  and  it  will  be  noted  further  that 
it  built  it  in  the  immediate  Pittsburgh  district,  on  ground  near 
the  National  Tube  Works,  where  the  Carnegie  company  was  not 
able  to  get  the  required  site.  All  of  which  seems  to  strengthen 
and  confirm  the  conclusion  of  the  insistent  requirement  of  inte- 
gration in  the  steel  trade  at  the  close  of  the  century.  The  like 
compulsory  integrating  influence  thus  shown  in  the  Pittsburgh 
district  evidenced  itself  also  in  the  great  Chicago  steel  district. 
In  that  district  the  Illinois  Steel  Company  held  the  same 
commanding  local  position  as  the  Carnegie  company  in  the 
Pittsburgh.  Its  natural  market  was  the  Chicago  district.  It 
had  a  rail  market  in  Canada  at  times  which  could  not  be  reached 
by  the  Carnegie.  In  spite  of  the  allegations  of  foreign  trade 
made  by  its  then  management,  it  really  had  little  or  none  and 
really  could  have  no  profitable  foreign  trade.  Such  foreign 
trade  as  it  had  to  Canada  was  of  the  spasmodic  character  here- 
tofore referred  to.  It  had  large  plants  at  Chicago  and  Joliet, 
III,  and  at  Milwaukee,  and  had  railroad  properties,  but  its  prod- 
uct of  basic  open-hearth  steel  was,  even  in  1890,  only  190,000 
tons,  as  compared  with  the  Carnegie  Company's  1,250,000  tons. 
It  lacked  the  finishing  units  of  sheet  steel,  steel  hoop,  and  tin 
plate  mills,  that  were  afterwards  acquired  in  pursuance  of  the 
integrating  policy  which  the  plans  of  the  United  States  Steel 


COMBINATION    IN   THE   STEEL   INDUSTRY  163 

Corporation  contemplated.  Practically  it  had  no  -stit)stantial 
wire  or  structural  output  and  no  tube  or  pipe  output  at  all.  In 
1898  the  Illinois  Steel  Company  entered  on  an  effort  to  integrate 
by  consolidation  and  with  foreign  trade  in  view.  In  pursuance 
of  its  integrating  policy,  the  lUinois  company  formed  the 
Federal  Steel  Company,  which  took  over  the  Minnesota  Iron 
Company.  This  gave  the  Federal  a  Lake  Superior  ore  reserve, 
its  own  railroad  transportation  to  Lake  Superior,  its  ore  fleets  to 
Chicago  and  lake  ports.  It  also  took  over  the  Lorain  Steel 
Company,  which  gave  it  mills  in  the  Cleveland  district,  and  at 
Johnstown,  Pa.,  in  the  Pittsburgh  district,  and  a  relative  approach 
to  the  seaboard.  These  mills  were  then  regarded  as  enabling 
the  Federal  company  to  supply  foreign  trade  from  those  dis- 
tricts. This  expectation  was  to  that  extent  justified,  for  the 
proofs  show  that,  so  far  as  their  individual  products  are  con- 
cerned, the  Lorain  and  Johnstown  mills  are  now  very  substantial 
factors  in  the  foreign  trade  developed  by  the  Products  company. 
But  apart  from  these  mills  the  Federal  Steel  had  no  facilities  for 
entering  into  foreign  trade,  and  the  proof  is  that,  even  with  all 
the  facilities  for  entering  such  trade  possessed  by  the  Steel 
Company,  but  2  per  cent  of  the  product  of  the  IlHnois  Steel 
Company  now  goes  into  foreign  trade,  and  that  part  goes,  not 
into  such  general  trade,  but  only  into  such  Canadian  markets  as 
its  location  permits.  The  integrating  steps  thus  mapped  out 
are  recited  in  the  proofs,  but  these  partial  efforts  at  complete 
integration  proved  disappointing  in  that  it  was  not  complete 
enough. 

Realizing  these  limitations,  and  that  the  Federal  Steel  Com- 
pany's operations  were  not  rounded  to  a  successful  manufactur- 
ing future,  the  proofs  show  that  steps  had  been  taken  just 
before  the  United  States  Steel  Corporation  was  formed  to  raise 
from  ^40,000,000  to  $45,000,000  in  further  integrating  the 
Federal  company.  That  such  steps  by  the  Federal  company 
had  as  their  real  basis  the  bona  fide  commercial  and  industrial 
requirement  of  further  integration  is,  just  as  we  have  shown  in 
the  case  of  the  Carnegie  Steel  Company,  also  shown  in  the 
Federal's  case  by  after  events  in  connection  with  later  events  in 
the  Chicago  district.     The  record  shows  that  the  Federal  com- 


1 64  TRUSTS,    POOLS   AND    CORPORATIONS 

pany  was  not  equipped  to  make  pipe  and  sheets  at  all,  and 
plates  only  to  a  relatively  small  extent,  and  had  no  complete 
line  of  finishing  mills.  It  further  shows  it  lacked  adequate 
open-hearth  capacity,  did  not  have  the  money  to  extend  it,  had 
very  limited  structural  product  facilities,  and  even  with  its  ore 
supplies  it  had  to  buy  other  ores  to  get  the  proper  mixtures. 
After  the  Steel  Company  was  formed,  in  order  to  supply  the 
needed  rounding-up  equipment  of  the  Chicago  district,  which 
the  Federal  lacked,  the  Steel  Corporation  made  large  additions 
in  that  district  at  Gary,  in  the  center,  and  at  Duluth  on  the 
northern  limit,  with  a  view  to  reaching  from  Duluth  the  west- 
ern Canadian  market.  In  that  regard  the  proofs  show  that 
some  $80,000,000  were  spent  in  building  at  Gary  open-hearth 
plants,  a  rail  mill,  structural  steel  plants,  bar  mills,  sheet  mills, 
and  plants  of  the  American  Bridge  Company  and  the  American 
Sheet  &  Tin  Plate  Company,  in  all  of  which  facilities  the  Illinois 
and  Federal  companies  were  deficient.  Along  the  same  line 
the  proofs  show  that  $10,000,000  ^re  being  expended  at  Duluth 
to  erect  blast  furnaces,  open-hearth  furnaces,  and  bar  and  mer- 
chant mills  with  which  to  supply  the  American  and  Canadian 
Northwest.  As  evidencing  this  trend  to  further  integration, 
the  desirability  of  the  Federal  Steel  Company  acquiring  the 
Carnegie  company  and  thus  integrating  eastward  was,  in  1899, 
brought  to  the  attention  of  the  Federal  Steel  Company  by  a 
representative  of  the  Carnegie  Steel  Company,  who  then  sug- 
gested : 

That  it  would  be  a  good  thing  for  the  Federal  Steel  interests  to 
purchase  the  Carnegie  property  and  perhaps  with  them  some  other 
properties,  which  included  finishing  mills  of  various  kinds,  suggesting 
companies,  the  Wire  Company,  the  Tin  Plate  Company,  and  some 
other  companies. 

The  matter  was  actively  taken  up  by  the  Federal  company, 
but  eventually  fell  through,  because  "  Mr.  Frick  was  not  wilHng 
to  agree  that  the  whole  Carnegie  organization,  including  himself, 
would  remain  in  the  company  and  assist  in  carrying  on  the  busi- 
ness." The  proofs  further  show  that  early  in  1900  Mr.  Schwab, 
the  president  of  the  Carnegie  company,  urged  the  buying  of 


COMBINATION    IN   THE    STEEL   INDUSTRY  165 

that  company  by  the  Federal,  and  efforts  were  again^made  to 
have  Mr.  Morgan,  who  was  a  member  of  the  board  of  the 
Federal  Steel  Company,  take  it  up,  which  he  declined  to  do. 

This  demand  for  integration  which  thus  evidenced  itself  in 
these  two  leading  companies,  each  attempting  to  integrate  back 
to  the  base  of  supply  and  also  into  more  extended  and  diversified 
finished  product,  also  evidenced  itself  in  other  branches  of  the 
steel  trade.  This  was  the  integration  of  mills  which  were  large 
consumers  of  plates,  ingots,  billets,  sheets,  rods,  structural  iron, 
and  other  semibasic  products.  Without  specifying  all,  we  may 
refer  to  the  steady  integration  of  these  various  subdivisions  of 
the  steel  trade.  This  began  in  December,  1898,  when  the  prin- 
cipal tin  plate  manufactories  integrated  by  consolidation  into  the 
American  Tin  Plate  Company.  In  January,  1899,  the  American 
Steel  &  Wire  was  formed  by  a  consolidation  of  all  the  leading 
wire  product  manufacturers.  This  was  followed  in  February, 
1899,  by  the  consolidation  into  the  National  Steel  Company  of 
12  per  cent  of  the  ingot  production  of  the  country,  which  was 
located  on  the  eastern  side  of  Chicago  and  the  western  side  of 
the  Pittsburgh  district.  The  same  month  saw  the  National  Tube 
Company  formed  by  great  concerns  making  various  kinds  of 
tubes  and  pipes.  In  March  of  the  same  year,  sheet  steelmakers 
in  large  tonnage  combined  to  form  the  American  Sheet  Steel 
Company,  and  in  April  of  the  same  year,  the  American  Steel 
Hoop  Company  was  formed  by  the  leading  makers  of  hoops, 
bands,  and  cotton  ties.  While  the  American  Sheet,  the  Ameri- 
can Hoop,  and  the  National  Steel  were  separate  companies,  yet 
for  integrated,  continuous  working,  they  were  in  effect  necessary 
to  each  other. 

This  integrated  relation  is  no  doubt  the  manufacturing  feature 
on  which  it  was  insisted  that  the  finishing  companies  would  not 
sell  to  the  Steel  Corporation  unless  the  National  was  also  pur- 
chased, as  Mr.  Carnegie  insisted  should  be  done.  In  the  same 
month  we  find  the  principal  structural  and  bridge  erectors  and 
producers  forming  the  American  Bridge  Company.  In  connec- 
tion with  this  consolidating  and  integration  of  structural  manu- 
facturers and  fabricators,  it  is  but  just  to  note,  as  illustrative  of 
compelling  forces  outside  that  industry,  the  demands  which  the 


l66  TRUSTS,    POOLS   AND   CORPORATIONS 

business  world  was  making  upon  the  structural  steel  industry. 
Thus  in  referring  to  the  American  Bridge  Company,  and  its 
carrying  forward  at  a  later  date  this  policy  of  expansion  and  local 
integrating  of  its  works,  the  proofs  show  that  such  great  opera- 
tions as  the  tall  buildings  of  recent  origin,  such  railroad  work  as 
the  Hell  Gate  Bridge,  and  such  national  work  as  the  Panama 
Canal,  practically  necessitate  the  existence  of  such  companies. 
In  that  respect  the  proof  is  railroad  bridges  are  — 

confined  to  those  companies  having  the  largest  plants  and  those 
equipped  for  that  sort  of  work.  There  are  very  few  companies,  for 
example,  that  could  build  a  bridge  like  the  Hell  Gate  Bridge,  involving 
40,000  tons  of  material  and  an  incidental  expense  of  perhaps  $300,000 
to  get  the  falsework  together.  When  we  secured  that  contract  we  had 
to  expend  immediately  $160,000  for  tools.  While  we  were  a  very 
large  concern  and  had  a  very  well-equipped  plant,  we  were  obliged 
to  buy  $160,000  worth  of  tools  for  that  particular  work.  .   .  . 

The  proofs  also  show  it  is  necessary  to  have  structural  plants 
in  different  localities. 

They  further  show  that  it  requires  a  large  plant  to  deliver 
such  contract  requirements  so  as  to  coordinate  with  other  parts 
of  the  work. 

It  will  thus  be  seen  that  these  large  modern  operations  practi- 
cally necessitate  correspondingly  large  manufacturing  facilities 
and  financial  resources  to  adequately  and  successfully  meet  such 
product  demands.  These  rapid,  widespread,  and  isolated  inte- 
grations of  different  subdivisions  of  the  steel  trade  cannot  be 
reasonably  explained  on  the  sole  theory  of  a  widespread,  domi- 
nating purpose  in  each  of  these  aggregations  to  monopolize  or 
restrain  trade.  In  the  first  place,  the  proof  is  simply  one-sided 
that  they  did  not  control  trade,  and  that  in  spite  of  their  size  and 
large  proportions  of  then  existing  trade,  their  competitors,  as  we 
have  already  seen,  have  increased  more  rapidly  than  they.  So 
that,  while  there  may  have  been  in  the  minds  of  those  who 
formed  them  the  possibility  of  monopoly  and  increase  of  price, 
we  are  inclined,  from  a  study  of  the  proofs  in  this  case,  to  the 
belief  that  the  real  underlying  influence  was  the  economy  of 
management,  the  locality  of   production   and   market,  and  the 


COMBINATION    IN   THE   STEEL   INDUSTRY  167 

continuity  of  process  which  resulted  from  such  integraii»n.  Take, 
for  example,  the  last  one  formed,  the  American  Bridge  Company. 
During  the  years  it  has  been  a  subsidiary  of  the  United  States 
Steel  Corporation  its  business  has  increased  42  per  cent.  In 
that  time,  its  competitors  have  increased  their  business  164  per 
cent.  During  that  time  the  American  Company  has  had  the 
help  of  all  the  associated  subsidiary  companies  of  the  Steel 
Company,  it  has  shared  in  all  the  economies  of  management, 
cooperation  and  financial  help  rendered  by  the  parent  company, 
yet  with  all  these  aids,  its  competitors  have  increased  their 
business  four  times  as  fast  as  its  own.  It  would  seem,  therefore, 
that  the  American  Bridge  Company  had  even  less  hope  or  power 
to  monopolize  when  it  was  originally  formed  and  stood  alone, 
when  it  could  not,  when  bought  by  the  Steel  Corporation,  so 
monopolize  the  steel  structural  business  of  the  country.  In 
view  of  such  facts,  we  have  been  impressed  with  the  view  that 
these  consolidations  and  integrations,  accomplished  or  in  view 
at  the  close  of  1900,  were  more  largely  made  with  a  view  to 
meeting  the  changing  conditions  in  the  steel  trade  in  its  transi- 
tion from  iron  to  steel  and  in  its  adjusting  itself  to  the  progress, 
improvement,  and  development  in  that  industry  rather  than 
with  monopoHstic  intent.  The  proof  in  regard  to  the  reasons 
for  the  formation  of  the  American  Bridge  Company  fairly  states, 
as  it  seems  to  us,  the  basic  reasons  which  led  to  the  unifying  of 
the  separate  branches  of  the  steel  industry.  Thus,  it  is  testified, 
with  respect  to  that  company's  formation,  as  follows  : 

A.  The  purpose  of  the  formation  of  the  American  Bridge  Company 
was  simply  along  the  lines  of  economical  shop  management,  and  had 
no  reference  whatever  to  any  monopoly  or  to  securing  the  entire  in- 
dustry of  the  country.  The  plants  which  became  a  part  of  the 
American  Bridge  Company  were  believed  to  be  in  a  position  to  be 
operated  more  economically  as  a  combined  whole  than  as  independent 
units,  and  the  foundation  of  that  company  was  the  securing  of  a  steel- 
works whereby  they  could  obtain,  to  a  large  extent,  the  control  of  their 
raw  material  for  fabrication,  the  basis  of  practically  all  structural  con- 
tracts being  one  of  time  ;  the  time  of  delivery  being  the  most  important 
factor  in  practically  90  per  cent  of  all  contracts  taken.  These  inde- 
pendent units  found  themselves  at  that  time  in  a  very  disadvantageous 


i68  TRUSTS,   POOLS  AND   CORPORATIONS 

position,  due  to  the  fact  that  the  large  steel  plants  were  commencing 
to  do  their  own  fabricating,  whereby  they  were  enabled  to  control  their 
rolling  mill  supplies  and  make  such  deliveries  as  these  independent 
fabricating  shops,  having  no  control  over  the  raw  material,  could  not  do. 

There  was  also  another  reason  for  it,  namely,  that  contracts  were 
increasing  so  rapidly  in  magnitude  that  as  independent  units  they  were 
unable  to  secure  sufficient  working  capital  to  enable  them  to  fabricate 
these  large  tonnages. 

You  can  trace  from  the  very  beginning  of  the  securing  and  assem- 
bling of  their  raw  material  through  the  designing,  fabrication,  transpor- 
tation, and  erection  work,  and  the  increase  in  their  working  capital, 
the  reasons  for  putting  together  those  plants,  which  were  of  two 
principal  characters  :  First,  they  were  partly  competitive,  I  might  say, 
by  reason  of  a  greater  or  less  similarity  of  output  and  by  reason  of  a 
common  territory  into  which  the  transportation  rates  enabled  them  to 
ship  the  material ;  and,  second,  plants  absolutely  non-competitive,  due, 
(a)  by  reason  of  an  entirely  dissimilar  output,  and  (b)  by  reason  of  their 
geographical  location. 

The  whole  scheme  was  one  to  decrease  cost  of  production  and  to 
operate  along  the  Hnes  of  what,  at  the  present  time,  is  termed  "  scientific 
shop  management."  As  a  matter  of  fact,  any  advance  in  prices  was 
not  discussed  to  my  knowledge  ;  nor  did  any  such  enhancement  ever 
take  place.  Competition  at  all  times  was  extremely  severe,  and  the 
profit  on  the  output  decreased  from  the  time  of  the  formation  of  that 
company  until  the  present  day.  A  number  of  concerns  were  offered 
to  the  American  Bridge  Company  at  the  time  of  its  formation,  which 
were  declined  for  various  reasons,  because  they  did  not  seem  to  be 
essential  in  the  rounding  out  of  the  proposition  that  I  have  referred  to. 

As  we  have  said  above,  it  may  have  been  the  fact  that,  apart 
from  the  operative  necessity  that  led  to  many  manufacturers 
putting  their  works  into  these  consolidations,  there  was  probably 
a  purpose  also  to  monopolize  and  restrain  trade,  yet  by  the  time 
the  Steel  Corporation  was  formed  the  inability  of  these  prior 
combinations  to  so  monopolize  trade  was  proven  to  those  who 
gave  heed  to  facts  and  figures.  Indeed,  as  we  gather  the  net 
results  of  these  different  plants  in  varied  steel  lines,  the  acquisi- 
tion of  which  (1901)  by  the  Steel  Corporation  is  alleged  to  evi- 
dence a  purpose  to  monopolize,  the  facts  and  figures  show  that 
in  only  one  product,  namely,  that  of  ingots  and  castings,  had 
there  been  an  increase  of  proportion  in  the  three  preceding  years 


COMBINATION    IN    THE   STEEL   INDUSTRY  169 

by  these  plants,  and  in  nine  other  branches,  the  plants-Avhich  the 
Steel  Company  subsequently  acquired  had  in  point  of  fact  in . 
those  three  years  clearly  shown  their  inability  to  monopolize  by 
a  decrease  of  relative  percentage  ranging  from  i  per  cent  in  the 
case  of  plates  and  sheets  to  16  per  cent  in  wire  nails.  And  that 
this  three  years'  decrease  in  actual  monopolistic  control  was  the 
normal  trend  of  the  steel  business  is  shown  by  the  fact  that  such 
proportions  continued  to  decrease  after  the  Steel  Corporation 
was  formed.  As  an  example  of  this  tendency  we  may  cite  the 
wire  plants  subsequently  acquired  by  the  Steel  Corporation, 
which  in  1898  had  88  per  cent  of  the  country's  production  and 
in  1890  had  fallen  to  72  per  cent,  had  by  191 1  so  continued  to 
lessen  their  proportion  of  the  part  sold  in  the  American  market 
that  it  was  then  but  42  per  cent  of  the  country's  production. 

We  have  thus  seen  the  unifying,  integrating,  and  rounding-up 
influences  which  were  irresistibly  forcing  those  engaged  in  the 
practical  work  of  making  steel  to  form  these  prior  combinations 
of  integrating  units.  The  proofs  show  that  Mr.  Morgan  was  a 
director  in  the  Federal  Steel  Company,  but  that  he  personally 
knew  nothing  of  the  steel  business.  His  firm  had  taken  part  in 
some  of  these  consoHdations,  but  the  suggestion  of  the  absorp- 
tion by  the  Federal  of  the  Carnegie  company  had  not  appealed 
to  him.  The  proof  is  that  while  he  was  a  member  of  the  board 
of  directors  of  the  Federal  Steel  Company  and  was  financially 
interested  in  it,  he  had  probably  never  attended  a  meeting  of 
the  board  and  taken  no  part  in  its  management  and  knew  noth- 
ing of  the  practical  steel  business.  The  conditions  in  the  steel 
trade  being  such  as  we  have  shown  above,  Mr.  Morgan,  in 
December,  1900,  attended  a  dinner  in  New  York  where  some 
80  men,  prominent  in  steel  manufacturing  and  the  banking 
business,  were  present.  This  dinner  was  given  to  Mr.  Schwab, 
the  president  of  the  Carnegie  Steel  Company.  Whether  the 
dinner  was  given  for  the  purpose  of  affording  an  opportunity  of 
interesting  Mr.  Morgan  in  buying  the  Carnegie  Steel  Company, 
which  the  bitter  differences  between  the  partners  in  that  com- 
pany and  the  desire  of  Mr.  Carnegie  to  retire  from  business 
then  made  possible,  there  can  be  no  doubt,  in  view  of  the  out- 
come, that  Mr.  Schwab  then  gave  to  the  bankers  present,  and 


I70  TRUSTS,    POOLS   AND    CORPORATIONS 

particularly  to  Mr.  Morgan,  who  was  seated  beside  him,  such  a 
comprehensive  view  of  the  steel  trade  as  was  well  calculated  to 
show  the  possibility  of  carrying  integration  to  its  logical  manu- 
facturing and  merchandising  efficiency,  and  afforded  the  Fed- 
eral company,  of  which  Mr.  Morgan  was  a  director,  the 
opportunity  to  carry  out,  on  a  large  scale,  the  policy  of  integra- 
tion that  company  had  planned  and  had  attempted  to  carry  out. 
And  there  can  be  no  doubt  that  Mr.  Schwab  realized  that  if  a 
sale  of  the  Carnegie  company  could  be  made  the  grave  discord 
among  the  partners  of  the  Carnegie  company  which  had  arisen, 
could  be  ended,  and  the  policy  of  integration  on  which,  as 
noted,  that  company  had  also  embarked,  could  be  carried  out  by 
some  larger  organization.  Indeed,  the  evidence  is  clear  that 
there  was  an  earnest  desire  on  the  part  of  the  owners  of  the 
Carnegie  company  for  several  reasons  to  sell. 

With  these  matters  no  doubt  in  view,  Mr.  Schwab  made  an 
address  as  already  quoted,  and  brought  into  clear  relief  three 
propositions  :  First,  that  steel  making  had  then  reached  the  limit 
of  improvement  in  metallurgical  methods ;  second,  that  further 
advance  was  dependent  on  integrating  processes  ;  and,  third, 
that  to  take  care  of  the  growing  steel  production  a  great  foreign 
trade  was  possible.  It  is  suggested  that  this  whole  talk  of 
integration  or  rounding  up  of  manufacturing  facilities  is  an  after- 
thought, and  a  mere  cloak  to  veil  a  concealed  purpose  to  monop- 
olize trade.  Let  us  examine  what  the  proofs  show  in  that 
regard. 

Looking  only  at  the  two  great  companies,  the  union  of  which 
made  possible  the  steel  company,  the  Federal  and  the  Carnegie, 
we  have  the  fact  that  both  these  companies  had  been  them- 
selves gradual  integration  growths,  and  their  managements 
were  then  trying  to  integrate  them  further.  The  Illinois  Steel 
had  entered  into  the  wider  field  of  the  Federal ;  it  had  integrated 
back  to  ore ;  it  was  trying  to  integrate  locally  into  eastern 
markets  through  Lorain  and  Johnstown,  had  considered  the 
acquisition  of  the  Carnegie  company  and  had  planned  to  spend 
some  forty  to  fifty  millions  of  dollars  in  further  broadening  its 
field  of  products.  For  making  the  great  basic  products  of  open- 
hearth  steel,  which  was  then  becomino^  the  dominant  factor  in 


COMBINATION    IN   THE    STEEL   INDUSTRY  1 71 

steel,  the  proofs  show  the  Federal  was  not  equi££ed.  The 
subsequent  location  of  the  great  open-hearth  plant  at  Gary- 
alone  shows  the  existence  of  the  Federal's  prior  need  of  further 
integration  without  reference  to  the  fact  that  it  was  lacking  in 
finishing  mills  for  rails,  bars,  structural,  sheets,  etc.  In  the 
same  way  we  have  seen  the  Carnegie  company  was  lacking  in 
finishing  plants  for  tubes,  wire,  hoops,  and  many  other  finishing 
plants  to  use  its  sub-basic  product.  These  patent  facts  and 
urgent  needs  —  facts  which,  as  we  have  seen,  were  set  forth  at 
the  time  in  the  minutes,  letters,  and  communications  heretofore 
quoted  —  evidence  the  existence  of  the  practical  manufacturing 
necessity  of  both  these  two  great  companies,  either  building  or 
buying  finishing  mills.  That  such  purpose  of  manufacturing 
integration  should  have  been  elaborated  and  formally  set  forth 
as  the  reason  for  its  purchase  by  the  Federal  company  of  the 
Carnegie  company  would  not,  in  the  nature  of  things,  be  done. 
Every  one  concerned  knew  these  facts  without  their  being 
stated.  It  was  a  thing  every  steel  man  recognized  so  fully  that 
no  specific  reference  would  be  naturally  made  to  it.  But  the 
proofs  do  show  that,  whatever  purpose  was  in  the  minds  of 
those  forming  the  Steel  Company,  integration  was  certainly  one 
of  the  special  objects  in  view.  Thus,  Mr.  Schwab  makes  it 
clear  that  "the  economic  advantages  to  be  derived  "  were  more 
enlarged  upon  even  than  foreign  trade.  "  I  might  say,"  is  his 
testimony,  "  that  I  enlarged,  and  perhaps  made  a  more  strenuous 
talk  to  Mr.  Morgan,  upon  the  subject  of  export  and  our  ability 
to  export,  and  foreign  business  in  foreign  markets,  than  any 
other  excepting  only  the  economic  advantages  to  be  derived." 

It  will  thus  be  seen  that  here  was  a  complete  outline  of  a 
manufacturing  plan  which,  if  carried  out,  enabled  the  Federal 
company  to  integrate  from  or  to  varied  finished  products,  and 
this  not  only  in  the  Chicago  district,  but,  through  the  acquisi- 
tion of  the  Carnegie  company,  through  the  Pittsburgh  district  as 
well,  and  through  this  latter  district  to  reach  the  foreign  mar- 
kets, which  it  was  powerless  to  reach  from  its  own  district,  and 
through  acquisition  of  the  finishing  mills  held  by  the  Tube,  the 
Sheet,  the  Wire,  and  Bridge  companies  to  obtain  the  varied 
product  facilities  by  which  alone  successful  foreign  trade  could 


172  TRUSTS,    POOLS   AND    CORPORATIONS 

be  built  up.  The  testimony  of  Robert  Bacon  also  shows  that 
the  whole  plan  turned  on  the  possibiHty  and  advisabihty  of  the 
Federal  buying  the  Carnegie  company,  and,  if  that  could  be 
effected,  that  certain  other  units  should  be  bought  to  provide 
adequate  finishing  plants. 

These  proofs  certainly  tend  to  show  that  the  practical  manu- 
facturing question  of  rounding  out  or  integrating  the  Federal 
company  by  acquiring  finishing  companies  was  one  of  the  ob- 
jects its  directors  had  in  view  at  this  meeting.  The  proofs  also 
show  that  these  several  finishing  mills  were  consumers  of  such 
basic  products  as  were  made  by  the  Federal  and  the  Carnegie, 
and  that  those  two  companies  had  no  such  finishing  mills  of 
their  own  as  was  adequate  to  consume  the  product  they  made, 
which  was  suitable  for  such  mill.  Without  entering  into  the 
details  of  the  proof  bearing  on  these  several  finishing  com- 
panies, all  of  which,  together  with  the  comments  thereon  are  to 
be  found  in  the  Statement  of  the  Case,  page  63  and  following, 
we  may  say  that  they  fairly  show  that  without  the  acquisition 
of  each  of  the  finishing  companies  named,  viz.  the  American 
Steel  &  Wire,  the  National  Tube,  the  American  Bridge,  the 
American  Steel  Hoop,  and  the  American  Sheet  Steel,  the  Federal 
Steel  Company,  even  with  the  acquisition  of  the  Carnegie,  would 
not  have  been  provided  with  adequate  finishing  facilities  for 
consuming  its  sub-basic  product.  And  further,  without  acquisi- 
tion of  the  first  three,  the  Federal  would  lack  several  of  the 
most  important  products  that  have  entered  into  the  foreign 
trade  built  up  by  the  United  States  Steel  Products  Company. 
It  will  also  be  noted  that,  in  addition  to  the  affirmative  testimony 
quoted  above  tending  to  show  that  integration  along  manufac- 
turing fines  and  development  of  foreign  trade  were  among  the 
avowed  purposes  of  those  who  formed  the  Steel  Corporation, 
there  is  a  negative  testimony  of  those  who  took  part  in  forming 
the  Steel  Corporation,  and  quoted  below,  that  monopoly  of  the 
steel  and  iron  business  was  not  the  purpose  for  which  that  cor- 
poration was  formed. 

First.  That  with  the  competition  left  outside  of  the  Steel  Com- 
pany, the  extent  of  which  has  already  been  shown,  a  monopoly 
of  the  steel  and  iron  business  of  the  United  States  was  simply 


COMBINATION    IN    THE   STEEL   INDUSTRY  173 

impossible,  and  that  no  effort  was  made  to  secure  ^ese  com- 
panies. 

Second.  That  in  view  of  the  fact  that  the  proportionate 
volume  of  competitive  business  has  increased  since  the  Steel 
Company  was  formed  and  that  the  proofs  show  no  attempt  by 
it  to  monopolize  it  to  the  exclusion  of  its  competitors,  to  now 
attribute  to  those  who  formed  the  corporation  an  intended  mo- 
nopolization would  be  to  say  that,  having  formed  the  corporation 
for  the  purpose  of  monopoly,  they  immediately  abandoned  such 
purpose  and  made  no  effort  to  accomplish  it. 

Third.  That  the  pubUcity,  which  the  proofs  show  the  Steel 
Company  has  from  time  to  time  made  its  prices,  its  accounts, 
and  its  policies,  would  seem  a  practice  in  line  with  legitimate 
business,  rather  than  with  illegal  monopolization. 

Fourth.  That  in  carrying  out  the  plan  the  advice  of  Abra- 
ham S.  Hewitt  was  taken  by  Mr.  Morgan,  and  at  the  latter's 
request  Mr.  Hewitt  went  on  the  board  and  served  until  his 
death,  is  a  fact  which,  in  view  of  the  high  character  of  Abra- 
ham S.  Hewitt,  tends  to  negative  the  contention  that  the  purpose 
in  view  was  to  violate  the  law. 

And  lastly,  as  stated  above,  there  is  affirmative  testimony  that 
no  such  object  was  in  view.  In  that  regard  the  testimony  of 
Robert  Bacon  is  not  to  be  overlooked.  His  service  as  Secretary 
of  State  under  one  administration,  as  Minister  to  France  under 
another,  coupled  with  the  selection  on  his  retirement  from  busi- 
ness to  positions  of  educational  character,  warrant  this  court  in 
attributing  weight  to  his  testimony.  The  testimony  of  Judge 
James  H.  Reed,  of  Judge  Gary,  and  of  Charles  M.  Schwab  is  to 
the  same  effect.  Recurring,  therefore,  to  the  particular  ques- 
tion with  which  this  particular  part  of  his  opinion  deals,  namely, 
whether  we  should  now  enter  a  decree  dissolving  the  Steel  Cor- 
poration on  the  ground  of  its  inherent  illegal  character  in  1901, 
and  whether  we  should  also  dissolve  the  several  constituent 
companies  which  it  acquired  on  the  like  ground  of  their  original 
inherent  illegal  character  when  they  were  formed,  we  think 
there  is  ground  for  our  holding,  in  view  of  the  facts,  proofs, 
and  views  above  set  forth,  that  we  are  not,  as  a  court  of  equity, 
warranted   in    taking   such  a  drastic   course  as  to  now  decree 


174  TRUSTS,    POOLS   AND    CORPORATIONS 

the    dissolution    of    the    Steel    Corporation    or    its    constituent 
companies. 

We  are,  however,  pointed  to  the  subsequent  acquisition  by 
the  Steel  Company  of  several  properties  as  being  attempted 
monopoly  or  restraint  of  trade,  and  as  evidencing  an  original 
purpose  to  monopolize  and  restrain.  The  first  of  such  was  in 
August,  1901,  when  the  Steel  Company  bought  the  Shelby  Steel 
Tube  Company.  Whatever  may  have  been  its  motive  at  the 
outset,  it  is  clear  the  purchase  effected  neither  monopoly  nor 
restraint  of  trade,  for  we  have  already  seen  that  while,  even 
with  the  acquisition  of  this  company,  the  Steel  Company's  out- 
put of  seamless  tube,  during  the  ten  years  of  its  existence,  has 
doubled,  during  the  same  period  its  competitors'  sales  have 
grown  sevenfold.  In  the  light  of  such  figures  and  facts,  we  are 
of  opinion  that  the  acquisition  was  simply  in  the  due  course  of 
normal  business,  and,  indeed,  was  but  the  virtual  carrying  out 
of  integration  plans  of  the  Carnegie  Steel  Company  that  long 
antedated  the  formation  of  the  Steel  Company.  Without  enter- 
ing into  minor  details,  we  may  say  that  no  proof  of  monopoly 
or  trade  restraint  was  shown  beyond  the  conceded  fact  of  pur- 
chase, and  the  fact  that  the  new  article  of  seamless  tubing  was 
in  some  uses  supplanting  lap-weld.  The  old  type  of  tubing  was 
called  "  lap-weld  "  and  made  by  the  National  Tube  Company. 
The  Shelby  company  made  a  different  article,  called  "  seam- 
less "  tube.  While  in  some  ways  lap-weld  and  seamless  were  in 
competition,  yet  their  main  uses  were  not  the  same.  The 
Shelby  Company  held  a  basic  patent  involving  the  piercing,  at 
an  early  stage,  of  the  billet  from  which  the  seamless  tube  was 
drawn.  Before  the  purchase  of  the  Carnegie  Steel  Company 
by  the  United  States  Steel  Corporation,  the  former  company,  in 
pursuance  of  its  purpose  to  enter  the  pipe  business,  was  carry- 
ing on  some  experimental  work  in  seamless  tube  making  at  the 
Shelby  Company's  plants,  and  its  management  had  become  con- 
vinced that  the  Shelby  method  was  the  proper  one.  Meanwhile 
the  National  company  had  also  determined  to  enter  the  seam- 
less tube  field,  and  to  that  end  had  bought  the  Standard  com- 
pany. The  latter  made  seamless  tube  under  a  patent  granted 
to  two  former  employees  of  the  Shelby  company.     Its  business 


COMBINATION    IN    THE   STEEL   INDUSTRY  175 

in  the  seamless  tubes  was  very  small,  and  it  had  previously  tried 
to  consolidate  with  the  Shelby  company.  Much  patent  litiga- 
tion had  resulted ;  the  National  company  carrying  on  the  con- 
test for  the  Standard  company. 

When  the  Steel  Company  was  formed,  two  divergent  views 
were  thus  presented  by  the  managements  of  two  of  its  units. 
The  National  Tube,  represented  by  Mr.  Converse,  contended 
the  Standard's  process  and  machinery  was  the  proper  mode  of 
seamless  tube  making.  The  Carnegie  Company,  represented 
by  its  president,  contended  the  Shelby  method  was  the  proper 
one.  The  determination  of  the  matter  seems  to  have  been 
made  by  two  directors  of  the  Steel  Company  who  had  taken 
no  part  in  the  contest  between  the  National  Tube  Company 
and  the  Carnegie  Steel  Company,  Their  testimony  is  that  they 
became  convinced  that  the  patent  of  the  Shelby  company  con- 
trolled the  situation.  That  company  would  only  sell  its  patent, 
however,  if  the  Steel  Company  also  bought  its  plant.  Such 
purchase  the  Steel  Company  made  in  order  to  get  the  patent. 
In  view  of  the  fact  that  the  Shelby  patent  has  been  sustained 
by  the  courts,  that  the  Steel  Company  on  its  purchase  aban- 
doned the  machinery  used  by  the  Standard  company,  and  has 
since  manufactured  under  the  Shelby  process,  we  are  satisfied 
that  the  acquisition  of  that  company  was  an  ordinary  purchase, 
and  had  no  other  purpose  than  to  acquire  and  use  the  legal 
monopoly  which  the  Shelby  company  had  obtained  from  the 
government  by  its  patent.  And  a  purpose  to  restrain  and 
monopohze  the  pipe  business  is  negatived  by  the  fact  that  no 
monopoly  has  resulted  and  that  pipe  sells  for  ^20  a  ton  less 
than  when  the  Steel  Company  was  formed. 

The  next  matter  in  the  line  of  alleged  monopoly  and  trade  re- 
straint was  the  purchase  by  the  Steel  Corporation  of  the  Union 
Steel  Company  in  December,  1902. 

We  are  of  opinion  that  the  purchase  of  the  Union  company 
was  a  natural  and  normal  acquisition,  incident  to  the  growth,  in- 
crease, and  needs  of  the  Steel  Corporation's  business,  and  was 
not  done  with  a  view  to  monopolizing  the  steel  business,  or  to 
restrain  trade  by  eliminating  competition. 

We  next  turn  to  the  acquisition  in  May,  1904,  of  the  Clairton 


176  TRUSTS,   POOLS  AND   CORPORATIONS 

Steel  Company.  The  Crucible  Steel  Company  was  engaged  in 
the  manufacture  of  tool  and  finer  grades  of  steel,  which  the 
Steel  Corporation  did  not  make. 

The  next  of  these  acquisitions  by  the  Steel  Company,  which 
it  is  alleged  was  made  to  monopolize  or  restrain  trade,  is  known 
as  the  Great  Northern  ore  lease,  which  was  a  lease  on  royalty  of 
some  thirty-nine  thousand  acres  of  Lake  Superior  ore  lands  in 
August,  1907.  This  lease  provided  for  the  payment  of  a  mini- 
mum royalty  of  750,000  tons  to  be  mined  in  1907,  1,500,000 
tons  in  1908,  and  an  increase  of  750,000  tons  each  year  until 
8,250,000  tons  was  reached  in  191 7.  That  yearly  amount  was 
then  to  be  taken  out  until  the  lease  ended  in  50  years.  The 
royalty  was,  using  round  figures,  $1.17  per  ton  on  49  per  cent 
ore,  $1.21  on  50  per  cent,  and  ^1.98  on  66  per  cent  ore,  with  an 
increase  of  3.4  cents  per  each  year  on  all  grades.  The  lease 
provided  the  Steel  Company  had  the  option  to  cancel  it  as 
of  January  i,  191 5.  During  that  time  the  lessee  had  full  rights 
to  test  the  premises.  In  pursuance  of  such  right  of  cancella- 
tion, the  Steel  Corporation  early  in  191 1,  and  prior  to  the  fiUng 
of  this  petition,  gave  notice  of  cancellation,  in  pursuance  of 
which  the  lease  was  subsequently  surrendered.  It  will  thus 
appear  that,  whatever  effect  the  leasing  and  continued  control 
of  this  ore  on  the  fact  of  the  monopolization  of  ore  reserves 
may  originally  have  had,  the  surrender  of  the  lease  lessened  the 
ore  holdings  of  the  company  to  a  point  far  below  any  possibility 
of  monopolization.  A  discussion  by  us  of  the  question  of  the 
possible  effect  of  this  lease  as  giving  monopohstic  control  would 
be  problematical,  and  the  uncertain  character  of  any  conclusion 
reached  is  best  emphasized  by  the  essentially  different  status  of 
the  ore  business  now  and  when  this  lease  was  made.  This  is 
due  to  the  subsequent  development  of  other  fields  and  to  the 
fact  that  ores  which  a  few  years  ago  were  looked  upon  as  not 
usable  can  now  be  used  under  new  methods. 

We  shall  ne.xt  consider  the  purchase  by  the  Steel  Company  of 
the  Tennessee  Coal  &  Iron  Company  which  was  made  in  Novem- 
ber, 1907.  On  the  one  hand,  it  is  alleged  the  Tennessee  com- 
pany was'a  competitor  of  great  power  and  that  its  purchase  was 
for  the  purpose  of  suppressing  competition  and  effecting  mo- 


COMBINATION    IN   THE   STEEL   INDUSTRY  177 

nopoly  and  restraint  of  trade.  On  the  other  hand,  it  is  con- 
tended that  the  competition  of  the  Tennessee  company  was  ot 
relatively  small  extent,  that  its  purchase  was  practically  forced 
upon  the  Steel  Company  as  a  means  of  averting  a  threatening 
financial  crisis  during  the  panic  of  1907,  and  that  such  purchase 
neither  did,  nor  tended  to,  monopolize  or  restrain  the  steel  and 
iron  industry  of  the  United  States.  Without  here  entering  upon 
a  detailed  analysis  of  all  the  proofs,  we  have  arrived  at  the  fol- 
lowing conclusions :  At  the  time  the  Steel  Company  bought 
the  Tennessee  company,  the  latter's  production  of  iron  and 
steel  was  1.7  per  cent  of  the  production  of  the  country.  That 
up  to  that  time  the  Tennessee  company  had  not  been  a  business 
success.  That  it  was  making  rails,  which  was  its  principal 
steel  product,  at  a  loss.  That  its  ultimate  success  was  problem- 
atic. That  such  success  involved  an  outlay  of  upwards  of 
^25,000,000  to  put  it  on  a  dividend  basis.  That  it  had  never 
really  earned  any  dividends  up  to  the  time  of  its  sale.  That  the 
whole  testimony  shows  its  relation  as  a  successful,  substantial 
competitor  with  the  Steel  Company  in  the  volume  of  its  busi- 
ness, the  character  of  its  product,  and  the  breadth  of  its  market, 
was  negligible.  We  are  warranted  by  this  testimony,  and  find 
the  fact  to  be,  that  its  purchase  by  the  Steel  Company  in  no 
way  tended  to  monopolize  the  steel  and  iron  trade,  and  that 
it  was  not  bought  with  the  purpose  or  intent  of  monopolizing, 
or  attempting  to  monopolize  or  restrain,  that  trade.  Such  nega- 
tive conclusions  and  findings  are  confirmed  by  the  affirmative 
proofs  showing  just  how  the  purchase  was  made,  namely,  as  a 
necessary  part  of  comprehensive  plans  of  bankers  and  business 
men,  sanctioned  by  President  Roosevelt,  to  check  the  panic 
of  1907,  which  was  then  at  its  height. 

Indeed,  as  to  this  purchase,  as  well  as  the  others,  which  we 
have  discussed  above,  sales  made  under  different  circumstances 
and  for  various  reasons,  we  cannot  but  feel,  in  the  light  of  the 
proofs,  that  they  were  made  in  fair  business  course,  and  were, 
to  use  the  language  of  the  Supreme  Court  in  the  Standard  Oil 
case,  "the  honest  exertion  of  one's  right  to  contract  for  his 
own  benefit,  unaccompanied  by  a  wrongful  motive  to  injure 
others." 


178  TRUSTS,    POOLS   AND   CORPORATIONS 

We  take  up  next  the  subject  of  the  "Gary  Dinners,"  which 
(as  already  stated)  we  have  reserved  for  separate  treatment. 
We  use  the  term  to  cover  a  comparatively  short  period,  begin- 
ning at  an  exceptional  business  situation,  and  continuing  until 
normal  conditions  were  reestabhshed.  These  dinners  —  which 
were  business  meetings  with  a  social  aspect  —  began  in  Novem- 
ber, 1907,  and  were  held  at  irregular  intervals  during  the  next 
15  months,  and  perhaps  a  later  date.  Probably  it  will  be  suf- 
ficient to  say  that,  whether  the  period  was  longer  or  shorter,  the 
element  that  marks  it  and  calls  for  consideration  now  is  what 
may  be  called  the  "  cooperation  "  of  the  Steel  Corporation  with 
a  large  number  of  independent  competitors,  who,  it  will  be 
noted,  are  not  made  parties  to  this  bill,  and  who  comprise  some 
45  per  cent  of  the  steel  and  iron  industry  of  the  United  States. 
This  is  the  only  instance  of  such  cooperation,  and  the  whole 
movement  was  exceptional.  There  is  some  dispute  in  the  briefs 
concerning  the  essential  characteristics  of  these  meetings,  but, 
in  our  opinion,  the  real  facts  appear  with  sufficient  clearness. 

We  may  begin  the  discussion  by  quoting  the  government's 
concession  in  the  original  petition  : 

It  is  not  here  alleged  that  merely  assembling  and  mutually  exchang- 
ing information  and  declaration  of  purpose  amount  to  an  agreement  or 
a  combination  in  restraint  of  trade. 

With  this  concession  we  are  in  full  accord.  In  these  days 
every  large  business  has  its  societies  and  associations,  and  these 
meet  periodically  to  exchange  information  of  all  kinds,  to  com- 
pare experiences,  to  take  note  of  improvements  in  machinery  or 
process,  to  discuss  problems,  and  generally  to  profit  by  the  in- 
terchange of  ideas  and  the  study  of  observed  facts.  When  the 
business  is  manufacturing,  of  course,  all  this  has  a  direct  bear- 
ing on  the  subject  of  prices,  and  these  conferences  may  therefore 
consider  that  subject  specifically.  It  is  probably  unusual,  how- 
ever, to  find  such  a  meeting  making  a  declaration  of  intention 
to  charge  such  and  such  prices,  although  a  mere  declaration  to 
that  effect  could  hardly  be  regarded  as  unlawful.  Freedom  of 
speech  and  freedom  of  individual  action  are  justly  prized  in 
American  society,  and  no  legislation  forbids  men  to  come  to- 


COMBINATION    IN   THE   STEEL   INDUSTRY  179 

gether  and  speak  freely  to  each  other  about  every  deiail  of  their 
common  business.  And  if  each  individual  should  choose  to  _ 
announce  at  such  a  meeting  the  specific  price  he  intends  to 
charge  for  his  wares,  we  are  aware  of  no  law  that  forbids  him 
so  to  do.  But  at  this  point  we  approach  debatable  ground,  for 
an  individual  is  permitted  to  do  some  things  that  are  denied  to 
an  association  of  individuals ;  and  where  at  a  meeting  of  many 
persons  such  action  is  taken  whose  legality  is  afterwards  called 
in  question,  the  decision  may  be  vitally  affected  by  ascertaining 
the  fact  whether  the  action  was  really  taken  by  each  individual 
acting  for  himself,  or  whether  those  present  were,  in  fact,  pur- 
suing a  common  object. 

This  country  has  always  been  committed  to  the  principle  of 
fair  and  real  competition  in  business  —  the  struggle  between  in- 
dividuals to  sell  goods  in  a  market  free  from  artificial  control  or 
influence  —  and  the  Sherman  Act  merely  repeats  this  principle 
when  it  condemns,  in  the  first  section,  "  every  contract  or  com- 
bination in  restraint  of  trade."  When,  therefore,  individuals  or 
corporations  make  distinct  contracts  with  each  other,  either  in 
the  form  of  pools  or  other  agreements,  dividing  territory,  limit- 
ing output,  or  fixing  prices,  there  can  be  no  question  about  the 
illegality  of  such  contracts.  And  it  makes  no  difference  whether 
or  not  the  agreement  attempts  to  fix  a  penalty  for  its  breach. 
The  essence  of  the  offense  is  that  agreement ;  the  penalty  is 
merely  an  incident ;  so  that  a  so-called  "  gentlemen's  agreement  " 
to  divide  territory,  etc.,  is  quite  as  illegal  as  a  formal  pool  with 
a  formal  penalty.  In  a  gentlemen's  agreement  the  sanction  is 
the  sense  of  honor,  the  moral  obligation,  the  indefinite,  but  real, 
force  that  in  some  instances  compel  persons  to  keep  their 
promises  simply  because  thay  have  promised. 

But  suppose  what  happens  is  this :  A  number  of  persons  take 
no  action  about  territory  or  output,  their  discussions  being 
mainly  concerned  with  the  subject  of  price,  and  suppose,  further, 
that  they  refrain  from  making  a  definite  formal  agreement,  and 
limit  themselves  to  an  understanding,  a  declaration  of  purpose 
—  an  announcement  of  intention  —  what,  then,  is  to  be  said  ? 
Have  they  offended  against  the  law  ?  This  question  cannot  be 
answered  until  we  know  what  the  participants  were  really  doing. 


i8o  TRUSTS,    POOLS   AND    CORPORATIONS 

It  is  not  enough  to  rest  upon  the  varying  names  that  may  be 
given  to  the  transaction.  It  is  of  the  utmost  importance  to 
know  how  these  names  are  to  be  interpreted,  and  this  is  the 
crucial  matter  to  be  looked  for  in  the  present  record.  Fortu- 
nately we  find  no  material  dispute  on  this  point  after  we  get 
below  the  mere  surface  of  much  that  has  been  said  by  tine 
witnesses. 

The  first  Gary  Dinner  was  held  in  November,  1907,  at  a  time 
of  unusual  financial  danger,  when  the  threat  of  a  serious  panic 
was  still  in  the  air,  and  when  ruin  to  many  important  interests 
was  by  no  means  improbable.  Tlie  meeting  was  attended  by 
representatives  of  from  90  to  95  per  cent  of  the  iron  and  steel 
trade,  including  the  corporation  and  a  large  majority  of  its  com- 
petitors, and  the  course  of  the  meeting  has  been  described  by 
several  of  those  in  attendance.  Charles  M.  Schwab,  now  presi- 
dent of  the  Bethlehem  Steel  Company,  testified : 

The  steel  trade  promised  to  become  in  a  very  demoralized  condi- 
tion. .  .  .  Prices  had  gone  very  low.  There  was  a  very  scant  demand 
for  steel.  As  I  stated  before,  many  people  had  their  warehouses  full 
of  steel.  When  I  say  there  was  a  demoraUzed  condition,  I  mean 
people  felt  that  the  market  was  going  to  go  very  low,  and  they  were 
loaded  with  stocks.  In  general,  there  was  a  very  uneasy  feeling 
throughout  the  whole  situation. 

Q.  To  what  class  was  this  situation — to  what  class,  I  mean,  of  per- 
sons interested  in  the  steel  industry,  was  this  situation  —  particularly 
threatful  ? 

A.  To  the  people  who  had  stocks  ;  the  merchants  of  steel,  the 
sellers  of  steel,  the  retailers. 

Q.  The  middlemen  or  merchants  ;  the  retailers  ? 

A.  Exactly;  the  warehousemen. 

Q.  Were  they  especially  loaded  up  at  that  time  ? 

A.  They  were.  ...  A.  The  keynote  of  the  whole  dinner  was  an 
address  by  Judge  Gary,  or  rather  a  talk  to  all  the  members  there,  with 
a  view  of  their  not  becoming  panic-stricken  ;  with  a  view  of  their  not 
sacrificing  the  situation  by  too  great  a  cut  in  prices,  and  a  precipitation 
of  bad  business  methods ;  that  we  ought  to  retain  our  heads  and  not 
become  excited  over  a  situation  of  that  sort,  and  that  we  should  calmly 
await  the  return  of  prosperity  ;  that  our  usual  pro  rata  of  business 
would  probably  come  to  each  one  regardless  of  the  prices  at  which  it 


COMBINATION    IN   THE   STEEL   INDUSTRY  i8i 

was  done  ;  and  that  it  was  unwise  business  policy  and  bad  for  the  in- 
dustry, and  especially  bad  for  the  people  who  carried  stocks  to  precip- 
itate and  make  worse  such  a  demoralized  condition.  That  was  the 
keynote  of  everything  that  was  said  at  that  dinner. 

Q.  Was  anything  said  about  entering  into  an  agreement  fixing 
prices  or  output  ? 

A.  Nothing  whatever. 

Q.  Were  prices  mentioned  ? 

A.  Not  at  all. 

Q.  Was  any  price  of  any  product  mentioned  ? 

A.  No  ;  not  at  all. 

Q.  I  mean  a  definite  price  for  a  definite  product. 

A.  It  was  not  discussed  at  all. 

Q.  Only  a  general  talk  along  the  line  mentioned  ? 

A.  Just  a  general  talk  along  the  lines  indicated. 

Q.  Was  it  voted  to  appoint  a  general  committee  or  subcommittees 
at  that  meeting  to  study  and  take  care  of  the  situation  ? 

A.  I  do  not  know  whether  those  committees  were  appointed  at  the 
first  meeting  or  not,  but  they  were  ultimately,  I  know.  Committees 
were  formed  of  people  in  the  various  lines  of  industry,  people  familiar 
with  that  particular  line  of  industry,  to  take  up  in  detail  the  keynote 
expressed  at  the  first  dinner. 

We  think  it  likely  that,  if  this  first  meeting  had  not  been 
followed  by  others  and  by  the  appointment  of  committees  to 
continue  the  association  (loose  as  it  was)  that  resulted  from  that 
meeting,  no  complaint  would  be  heard  from  the  government. 
But  we  think  the  evidence  makes  it  plain  that  a  period  of  co- 
operation, or  action  with  a  common  object,  did  begin  in  Novem- 
ber, 1907,  between  the  Steel  Corporation  and  the  great  majority 
of  its  independent  competitors,  and  that  this  period  was  chiefly 
marked  by  an  understanding  concerning  the  maintenance  of 
price.  Other  matters  were  discussed  at  various  meetings,  but 
the  principal  concern  was  the  subject  of  prices,  and  other 
subjects  were  subordinate. 

Now^  to  our  minds  the  testimony  taken  as  a  whole  makes  the 
conclusion  inevitable  that  the  result  of  these  meetings  was  an 
understanding  about  prices  that  was  equivalent  to  an  agreement. 
We  have  no  doubt  that  among  those  present  some  silently  dis- 
sented and    went    away  intending    to    do  what    they   pleased ; 


1 82  TRUSTS,    POOLS   AND    CORPORATIONS 

but  many,  probably  most,  of  the  participants,  understood  and 
assented  to  the  view  that  they  were  under  some  kind  of  an 
obhgation  to  adhere  to  the  prices  that  had  been  announced  or 
declared  as  the  general  sense  of  the  meeting.  Certainly  there 
was  no  positive  and  expressed  obligation  ;  no  formal  words  of 
contract  were  used ;  but  most  of  those  who  took  part  in  these 
meetings  went  away  knowing  that  prices  had  been  named  and 
feeling  bound  to  maintain  them  until  they  saw  good  reason  to 
do  otherwise,  and  feeling  bound  to  maintain  them  even  then 
until  they  had  signified  to  their  associates  their  intention  to 
make  a  change.  We  cannot  doubt  that  such  an  arrangement  or 
understanding  or  moral  obligation  —  whatever  name  may  be  the 
most  appropriate — amounts  to  a  combination  or  common  action 
forbidden  by  law.  The  final  test,  we  think,  is  the  object  and  the 
effect  of  the  arrangement,  and  both  the  object  and  the  effect 
were  to  maintain  prices,  at  least  to  a  considerable  degree. 

We  have  said  that  this  was  the  effect  intended,  and  we  be- 
lieve it  to  be  true,  also,  that  in  actual  effect  prices  were  more  or 
less  maintained.  But  it  is  quite  as  true  that  a  large  section  of 
the  trade  paid  little  attention,  if  any,  to  this  effort  at  cooper- 
ation. We  need  not  quote  again  from  the  record  to  establish 
this  point,  for  we  have  already  made  sufficient  extracts  earlier 
in  this  opinion.  The  testimony  quoted  on  pages  84  to  88,  will 
make  it  abundantly  clear,  we  think,  that,  even  during  the  period 
of  cooperation,  the  prices  announced  and  informally  assented  to 
at  these  meetings  were  not  regarded  at  all  by  many  manufac- 
turers ;  for  it  is  plain  that  the  consumers  who  testified  had  no 
difficulty  buying  at  rates  sensibly  below  the  prices  thus  referred 
to.  It  is  only  fair  to  add  that  in  our  opinion  the  participants  in 
this  movement  did  not  intend  to  act  illegally.  No  doubt  they 
did  intend  to  exercise  their  full  legal  rights,  but,  of  course,  such 
exercise  could  not  be  wrong,  and  they  believed  they  had  suc- 
ceeded in  keeping  within  the  proper  limits.  For  the  reasons 
given,  we  think  they  were  mistaken  ;  but  we  acquit  them  of 
trickiness  or  attempted  evasion. 

But  the  period  of  cooperation  had  passed  away  before  the  bill 
was  filed,  and  as  far  as  we  can  see  it  is  not  likely  to  be  repeated. 
We  do  not  think  the  Gary  movement  would  justify  us  in  impos- 


COMBINATION    IN   THE   STEEL   INDUSTRY  183 

ing  so  drastic  a  penalty  as  the  dissolution  of  the  corporation ; 
but  we  will,  if  the  government  moves  for  such  action,  retain  the 
bill  for  the  purpose  of  restraining  any  similar  movement  by  the 
defendants  that  might  be  contemplated  hereafter.  We  may 
perhaps  suggest  that  under  recent  legislation  Congress  may 
have  provided  a  sufficiently  inclusive  remedy  for  any  future 
action  that  might  have  for  its  object  the  adoption  or  the  main- 
tenance of  unreasonable  prices. 

In  brief,  the  conclusions  of  the  court  are  these  :  As  to  some 
of  the  defendants  it  is  apparent  the  bill  should  be  dismissed. 
Concerning  the  principal  rehef  sought  against  the  corporation 
and  its  subsidiaries,  we  are  of  opinion  that  the  government  has 
not  made  out  a  case  that  should  be  followed  by  a  decree  of  dis- 
solution, and  we  are  also  of  opinion  that  sufficient  reasons  have 
not  been  afforded  to  justify  us  in  now  awarding  an  injunction. 
But,  as  already  stated,  if  the  government  so  desires,  the  court 
will  retain  jurisdiction  of  the  cause  for  the  purpose  above 
outlined. 

Woolley,  Circuit  Judge,  with  whom  Hunt,  Circuit  Judge, 
concurs. 

My  conclusions  of  fact  and  of  law  are  that  the  organizers  of 
the  corporation  (i)  intended  to  create  a  monopoly  and  to  restrain 
trade,  and  (2)  combined  with  others  and  attempted  to  monopo- 
lize trade,  within  the  meaning  of  the  act,  and  that  the  corporation 
(i)  neither  attempted  nor  possessed  the  power  alone  to  do  the 
unlawful  things  intended  by  its  formation,  but  (2)  that  it  unlaw- 
fully combined  with  others  to  restrain  trade  by  controlling  prices. 

Whatever  remedy  there  may  be  against  the  organizers  of  the 
corporation  for  acts  violative  of  the  statute,  certainly  in  this  pro- 
ceeding in  equity  a  decree  of  dissolution  cannot  be  awarded 
against  the  corporation  for  the  unlawful  intent  and  the  unsuc- 
cessful attempt  of  its  organizers  to  violate  the  law.  Upon  the 
finding  that  the  corporation,  in  and  of  itself,  is  not  now  and  has 
never  been  a  monopoly  or  a  combination  in  restraint  of  trade,  a 
decree  of  dissolution  should  not  be  entered  against  it.  Having 
found,  however,  that  the  corporation  violated  one  of  the  provi- 
sions of  the  statute  by  combining  with  others  to  unduly  restrain 


1 84  TRUSTS,    POOLS   AND    CORPORATIONS 

trade,  and  that  it  possesses  the  power  to  again  unlawfully  com- 
bine with  others  to  do  the  same  unlawful  acts,  and  though  not 
actively  threatening,  yet  because  of  the  disposition  displayed 
throughout  the  larger  portion  of  its  history,  it  may  again  do  so, 
I  am  of  opinion,  that  the  corporation  should  be  prevented  doing 
the  things  and  repeating  the  practices  respecting  the  fixing  and 
maintaining  of  prices  herein  viewed  illegal.  The  ordinary  relief, 
obviously,  is  the  injunction  process  of  the  court,  which,  in  an 
ordinary  situation,  would  follow  such  a  finding  as  of  course. 
I  am  satisfied,  however,  that  the  same  end  will  be  attained,  in  a 
manner  consistent  with  recent  legislation,  by  retaining  jurisdic- 
tion of  the  bill,  if  desired  by  the  government,  for  the  purpose 
of  restraining  the  defendants  against  engaging  in  the  price  fixing 
practices  found  illegal. 


VI 

UNITED  STATES  STEEL  CORPORATION  FINANCE^ 
CAPITALIZATION    AND    INVESTMENT    IN    1901 

THE  relation  of  the  assets  and  actual  investment  of  this 
great  combination  to  the  securities  issued  is  of  high  public 
importance  in  estimating  both  the  status  of  the  Corporation 
itself,  the  reasonableness  of  its  profits,  and  its  other  effects  on 
the  interests  of  the  public. 

The  Corporation  in  1901,  after  its  organization  had  been 
fairly  completed  (and  including  the  acquisition  of  the  Shelby 
Steel  Tube  Company,  which  did  not  occur  until  August),  had  a 
total  outstanding  capitalization,  including  underlying  bonds, 
sundry  mortgages,  and  purchase-money  obligations  (but  exclud- 
ing $535,407  unacquired  stock  of  subsidiaries),  as  follows  : 

Preferred  stock ^510,205,743 

Common  stock 508,227,394 

Steel  Corporation  bonds 303,450,000 

Underlying  bonds 59,091,657 

Purchase-money  obligations  and  real-estate  mortgages     .      .     .  21,872,023 

Total ^1,402,846,817 

For  the  purposes  of  the  Bureau's  investigation  it  was  essential 
to  make  an  analysis  of  the  actual  value  of  the  physical  proper- 
ties of  the  Corporation  in  1901,  upon  which  this  huge  capitaliza- 
tion was  based.  The  Bureau  has  made  such  an  analysis  by 
three  different  methods: 

First,  by  organization  history  —  that  is,  from  historical  study  of 
the  organization  and  investment  of  the  constituent  concerns  at 
the  time  of  their  formation. 

Second,  by  market  value  of  securities  —  that  is,  by  computation 
of  the  public  estimate  of  the  value  of  the  properties  of  those 

1  From  U.  S.  Commissioner  of  Corporations,  Report  on  the  Steel  Industry,  Vol.  I, 
July  I,  191 1,  pp.  14-38,  239-251,  40-60. 

185 


1 86  TRUSTS,   POOLS  AND   CORPORATIONS 

constituent  concerns  as  reflected  in  the  market  prices  of  their 
securities. 

Third,  by  departments  of  business  —  that  is,  by  a  detailed  esti- 
mate of  the  physical  properties  of  the  company  by  departments 
of  its  business,  computed  from  all  available  data  and  with  an 
especially  elaborate  calculation  of  the  value  of  the  ore  property. 

The  valuation  arrived  at  by  the  Bureau  by  the  first 
method,  which  is  chiefly  for  tangible  assets,  is  approximately 
^676,000,000;  the  valuation  arrived  at  by  the  second  method, 
which  includes  intangible  considerations,  is  approximately 
$  793,000,000 ;  the  valuation  arrived  at  by  the  Bureau  by  the 
third  and  more  precise  method,  this  being  for  tangible  assets 
only,  is  approximately  $682,000,000. 

.  None  of  these  valuations  includes  any  value  imparted  to  these 
properties  by  the  very  act  of  merging  them  into  the  Steel  Corpo- 
ration and  treating  them  as  a  unified  going  concern.  Obviously 
such  a  value  must  be  largely  due  to  the  element  of  concentra- 
tion of  control  and  consequent  elimination  of  competition, 
which  value  should  not  be  included  in  the  present  discussion. 

It  may  be  noted  at  this  point  that  the  United  States  Steel 
Corporation  is  a  holding  company,  practically  its  entire  property 
consisting  of  the  securities  of  a  number  of  subsidiary  concerns, 
some  of  which,  moreover,  in  turn  own  stocks  in  underlying  con- 
cerns. For  the  sake  of  brevity  and  clearness  in  this  report, 
however,  it  will  be  convenient  to  refer  to  the  physical  properties 
thus  controlled  as  though  they  were  directly  owned  by  the 
Corporation  itself.  For  all  practical  purposes  such  is  indeed 
the  fact. 

Estimated   Value   of   Corporation's   Property,    Based   on 
Study  of  Organization  of  Constituent  Concerns 

The  Bureau's  estimate  of  the  value  of  the  Steel  Corporation's 
property,  arrived  at  by  a  study  of  the  organization  of  the  con- 
stituent concerns  —  approximately  $676,000,000  —  includes  the 
entire  physical  property  and  not  merely  the  equity  over  and 
above  bonded  indebtedness  (which  indebtedness,  for  these  con- 
stituent concerns,  is  assumed  to  represent  an  equivalent  invest- 


UNITED    STATES   STEEL   CORPORATION   FINANCE      187 

ment  in  property).  It  includes  only  a  negligible  allowance  for 
intangible  considerations. 

In  the  main  the  valuations  arrived  at  are  based  upon  the 
method  by  which  these  constituent  companies  were  organized. 
A  very  common  basis  of  organization  was  to  determine  upon 
cash  prices  for  the  plants  acquired  and  then  to  give  the  vendors 
(the  owners  of  the  plants)  the  option  of  taking  the  price  in  cash 
or  of  taking  preferred  stock  up  to  the  full  amount  of  the  cash 
option  figure,  with  a  large  bonus  in  common  stock.  New  cash 
capital  frequently  was  raised  on  the  same  terms.  The  result  of 
this  method  of  organization  was  that  the  preferred  stock  of  the 
consolidated  concern  at  its  original  organization  represented 
practically  the  entire  value  of  the  property  acquired  —  certainly 
the  entire  value  of  the  physical  assets. 

This  was  the  method  followed  in  the  four  "  Moore  "  com- 
panies, viz.  National  Steel  Company,  American  Tin  Plate 
Company,  American  Sheet  Steel  Company,  and  American  Steel 
Hoop  Company. 

In  the  case  of  at  least  three  of  these  companies  a  considerable 
block  of  the  common  stock  was  issued  to  the  promoters  as  a 
"commission"  for  their  services;  in  the  case  of  the  American 
Sheet  Steel  Company  apparently  some  preferred  stock  was  also 
issued  for  this  purpose. 

In  the  organization  of  the  American  Steel  and  Wire  Company 
the  preferred  stock  likewise  covered  the  entire  value  of  the 
physical  property  acquired  at  the  time  of  organization,  all  of 
the  common  stock  being  issued  either  as  a  bonus  or  for  under- 
writing services.  The  same  method,  substantially,  was  followed 
in  the  organization  of  the  National  Tube  and  American  Bridge 
companies. 

The  common  stock  of  the  Federal  Steel  Company,  however, 
appears  to  have  had  some  property  value  back  of  it.  .  .  . 

The  valuation  of  the  Carnegie  company's  property  is  more 
difficult  because  the  organization  of  this  concern  was  arranged 
privately  by  the  former  owners,  and  because  its  securities  were 
never  actively  dealt  in.  The  book  value  of  the  property  of  the 
old  Carnegie  Steel  Company  (Ltd.)  (which  had  approximately  a 
29^-  per  cent  interest  in  the  H.  C.  Frick  Coke  Company)  on 


1 88  TRUSTS,  POOLS  AND    CORPORATIONS 

March  i,  1900,  or  just  before  these  two  concerns  were  trans- 
ferred to  the  Carnegie  company  of  New  Jersey,  was,  roughly, 
$81,500,000.  This  book  vahie,  while  correct  for  some  of  the 
properties  of  the  company,  undoubtedly  understated  the  value 
of  others,  particularly  the  item  of  "  investments."  Using  such 
data  as  were  available,  the  Bureau  has  arrived  at  the  conclusion 
that  the  tangible  property  of  the  Carnegie  concern  in  March, 
1900,  was  not  in  excess  of  the  $160,000,000  bond  issue  (the  com- 
pany also  issued  $160,000,000  of  stock).  A  suggestive  fact  is 
that  in  organizing  the  New  Jersey  company  $125,000,000  of 
bonds,  and  a  like  amount  of  stock,  were  allotted  for  the  various 
Carnegie  steel  properties,  and  $35,000,000  of  bonds  and  an 
equal  amount  of  the  stock  for  the  H.  C.  Frick  Coke  Company. 
This  clearly  is  analogous  to  a  similar  distribution  of  preferred 
and  common  stock  in  the  case  of  several  of  the  other  con- 
stituent concerns  of  the  Steel  Corporation.  These  terms,  in' 
connection  with  other  evidence  presented  in  the  body  of  the 
report,  indicate  that  the  Carnegie  interest  issued  bonds  up  to 
subtantially  the  full  amount  of  tangible  property,  leaving  the 
stock  to  cover  intangible  considerations. 

The  Lake  Superior  Consolidated  Iron  Mines  has  been  entered 
in  the  Bureau's  estimate  at  a  value  equal  to  the  par  of  its  out- 
standing stock,  approximately  $29,400,000.  .  .  . 

The  foregoing  valuations,  it  should  be  kept  in  mind,  are 
applicable  at  the  dates  of  the  respective  organizations  of  the 
companies  named,  except  in  the  case  of  the  last  four  concerns, 
where  the  figures  given  apply  to  the  dates  of  acquisition  by 
the  Steel  Corporation.  By  April,  1901,  the  various  constituent 
concerns  had  increased  their  property  investment,  through 
surplus  earnings,  to  the  extent  of  approximately  $117,700,000. 
Adding  this  sum,  together  with  $25,003,000  new  cash  capital 
provided  the  Steel  Corporation,  to  the  valuations  stated  above 
and  including  underlying  bonds,  purchase-money  obligations, 
and  real-estate  mortgages  (which  also  cover  any  additions  to 
the  property  made  in  this  way),  brings  the  indicated  total  invest- 
in  the  physical  property  acquired  by  the  Steel  Corporation  in 
1 90 1  up  to  approximately  $676,000,000,  as  shown  by  the  table 
on  the  succeeding  table.     [P.  19  of  Report,  omitted.] 


UNITED    STATES   STEEL   CORPORATION    FINANCE     189 

Valuation  of  Constituent  Companies  as  indicated  by 
Market  Prices  of  their  Securities 

The  valuation  of  the  properties  of  these  constituent  concerns 
arrived  at  by  the  second  method  of  analysis  is  based  upon  the 
market  value  of  their  securities.  Using  average  weekly  prices, 
where  available,  and  again  adding  underlying  bonds,  purchase- 
money  obligations,  and  real-estate  mortgages,  at  par,  as  well  as 
$2  5,oo3,oooof  new  cash  capital  provided  for  the  Steel  Corpora- 
tion, the  indicated  valuation  is  approximately  $793,000,000,  as 
shown  in  the  table  on  the  next  page.     [P.  20  of  Report,  omitted.] 

When  it  is  taken  into  consideration  that  these  market  prices 
include,  of  course,  an  allowance  for  earning  power  and  other 
intangible  considerations,  this  total  of  $793,000,000  indicates 
that  the  preceding  valuation  of  $676,000,000  for  the  tangible 
property  alone  is  sufficiently  liberal. 

Estimated  Valuation  of  Property  of  Steel  Corporation 
IN  1901   BY  Departments  of  its  Business 

Both  of  the  foregoing  estimates  are  necessarily  somewhat 
general.  The  estimate  of  the  Bureau,  based  on  the  third 
method  stated  —  that  is,  by  departments  of  the  Corporation's 
business  —  was  prepared  on  a  more  detailed  basis. 

Before  proceeding  to  discuss  this  estimate,  it  should  be  noted 
that  the  Steel  Corporation  itself,  in  July,  1902,  in  litigation  then 
pending,  submitted  an  estimate  of  the  value  of  its  assets,  by 
principal  departments,  as  follows  : 

estimate  of  value  of  tangible  assets  of  united  states 

steel   corporation   on   JULY    i,    1902,    SUBMITTED   BY   THE 
corporation   in   the   "HODGE"    SUITi 

Ore  properties ^700,000,000 

Plants,  mills,  fixtures,  machinery,  equipment,  tools,  and  real  estate  .  300,000,000 

Blast  furnaces           ..........  48,000,000 

Coal  and  coke           ..........  100,000,000 

Transportation  properties         ........  80,000,000 

Natural  gas  fields      ..........  20,000,000 

Limestone  properties        .........  4,000,000 

Cash  and  cash  assets        .........  148,291,000 

Total $1,400,291,000 

1  Chapter  VII,  infra. 


190  TRUSTS,   POOLS  AND   CORPORATIONS 

This  estimate  of  the  Steel  Corporation  was  submitted  for  the 
purpose  of  defending  its  huge  capitalization,  which  was  then 
directly  challenged  as  one  of  the  vital  issues  in  the  suit.  As 
the  legal  right  of  the  Corporation  to  carry  out  a  proposed 
conversion  of  a  portion  of  its  preferred  stock  into  bonds  was  de- 
pendent upon  the  amount  of  its  assets  there  was  a  great  induce- 
ment before  the  Corporation  to  overstate  the  value  of  its 
property  in  order  to  justify  its  capitahzation.  As  shown  later 
some  of  the  Corporation's  figures  greatly  exaggerated  the  true 
values. 

The  Bureau  for  the  purposes  of  this  third  method  of  analysis 
has  used  the  classification  of  property  employed  by  the  Corpora- 
tion, shown  in  the  preceding  table.  The  basis  of  the 
Bureau's  estimates  by  the  different  classes  may  now  be  briefly 
explained.  For  convenience  in  discussion  the  value  of  the  ore 
property  will  be  taken  up  last. 

Manufacturing  Properties 

For  most  of  the  subsidiary  companies  of  the  Steel  Corpora- 
tion the  Bureau's  valuations  of  the  manufacturing  plants  were 
arrived  at  by  deducting  from  the  par  value  of  the  preferred 
stock  issued  at  their  respective  organizations  the  amounts  of 
working  capital  provided.  The  preferred  stock,  as  already 
shown,  in  most  cases  represented  the  total  assets  acquired, 
which  in  several  instances  consisted  exclusively  of  plants  and 
working  capital.  Therefore  the  values  of  the  plants  could  be 
arrived  at  by  deducting  the  working  capital  from  the  amount  of 
preferred  stock.  As  the  properties  were  acquired  as  going 
concerns,  the  preferred-stock  issues  probably  included  in  some 
cases  an  allowance  for  intangible  considerations,  and  this  method 
may  therefore  somewhat  overstate  the  value  of  the  plants. 
This  method  was  used  in  the  case  of  the  American  Steel  and 
Wire  Company,  the  National  Steel  Company,  the  American  Tin 
Plate  Company,  the  American  Steel  Hoop  Company,  the 
National  Tube  Company,  and  the  American  Bridge  Company. 
In  the  case  of  the  National  Steel  Company,  an  addition  of 
$2,561,000  was  made  on  account  of  bonded  indebtedness,  which 


UNITED    STATP:S   STEEL   CORPORATION    FINANCE      191 

was  considered  as  representing  an  equivalent  inv^mcnt  in 
manufacturing  properties.  (Additional  bonds  were  subsequently 
issued  by  this  company,  but  almost  entirely  for  other  kinds  of 
property.)  A  few  of  the  other  concerns  had  small  amounts 
of  indebtedness,  bringing  the  total  addition  on  this  account  up 
to  $3,000,000.  In  the  case  of  the  American  Sheet  Steel  Com- 
pany, owing  to  evidence  that  even  the  preferred  stock  was 
heavily  "watered,"  the  value  of  the  manufacturing  plants  was 
fixed  at  $12,000,000,  although  the  preferred-stock  issued  was, 
roughly,  $24,500,000.  An  addition  of  $1,000,000  was  made 
to  cover  certain  detached  real  estate.  This  company  had 
$2,000,000  of  bonded  debt,  but  this  has  been  considered  as 
representing  its  natural-gas  property. 

The  value  given  the  plants  of  the  Carnegie  company  was  the 
book  value,  as  shown  in  the  balance  sheet  of  March  i,  1900. 
In  the  case  of  the  Federal  Steel  Company,  likewise,  the  value 
for  its  Illinois  Steel  Company  plants  was  the  book  value  at  the 
time  of  their  acquisition,  while  the  value  taken  for  its  Lorain 
and  Johnson  companies'  plants  was  practically  the  cash  equiva- 
lent paid.  The  bond  issues  of  these  concerns,  therefore,  do  not 
have  to  be  considered. 

The  Shelby  Steel  Tube  Company  plants  have  been  valued  at 
$3,000,000. 

The  other  constituent  companies  mentioned  in  the  list  did 
not  have  any  manufacturing  plants. 

The  valuations  thus  arrived  at  are  summarized  in  the  table  on 
the  following  page. 

This  total  of  $196,654,000,  it  should  be  emphasized,  is  the 
indicated  value  of  the  manufacturing  plants  and  accompanying 
real  estate  at  the  respective  dates  of  organization  of  these  con- 
stituent concerns  (except  in  the  cases  of  the  American  Bridge 
and  Shelby  Steel  Tube  companies),  and  not  the  value  at  the 
time  of  transfer  to  the  Steel  Corporation.  As  shown  above,  the 
aggregate  surplus  earnings  of  all  the  subsidiaries  from  the  dates 
of  their  respective  organizations  to  April  i,  1901,  were  approxi- 
mately $117,700,000.  A  part  of  this  was  invested  in  manu- 
facturing properties,  and  a  portion  of  the  original  working 
capital  of  these  concerns  was  also  used  for  this  same  purpose. 


192 


TRUSTS,    POOLS  AND   CORPORATIONS 


Bureau's  Estimate  of  Investment  of  Constituent  Companies  of  United  States 

Steel  Corporation  in  :Manufacturing  Plants  (Including  Blast  Furnaces) 

AND  Rkal  Estate  at  the  Dates  of  their  Respective  Organizations 


Company 

Preferred 
Stock  Issued 

Current 

Assets  at 

Organization 

Balance  to 

Represent 

Plants 

American  Steel  and  Wire  Company .      . 

$40,000,000 

$16,000,000 

$23,400,000 

National  Steel  Company  ^ 

27,000,000 

9,000,000 

1 8,000,000 

American  Tin  Plate  Company!     _     _     _ 

18,325,000 

4,500,000 

13,825,000 

American  Steel  Hoop  Company    .     .     . 

14,000,000 

3,000,000 

1 1 ,000,000 

National  Tube  Company 

40,000,000 

1 6,000,000 

24,000,000 

American  Bridge  Company  ^     ,     .     .     . 

31,374,000 

11.500,000 

19,874,000 

Other  companies  : 

Carnegie  Company  (book  value)  . 

— 

— 

43.355.000 

Federal  Steel  Company  — 

Illinois  Steel  Company  (book  value) 

— 

— 

20,200,000 

Lorain  and  Johnson  companies  (ap- 

proximate cash  price)    .... 

— 

— 

4,000,000 

Shelby    Steel    Tube    Company    (ap- 

proximate cash  price) 

— 

— 

3,000,000 

American  Sheet  Steel  Company  (esti- 





1 3,000,000 

Add  to  cover  investment  in  manufac- 

turing plants   represented  by  mis- 

cellaneous bonds      

— 

— 

3,000,000 

Total 

— 

— 

196,654,000 

Just  how  much  was  invested  in  manufacturing  plants  is  not 
definitely  known.  Large  sums  were  invested  in  ore,  coal,  and 
transportation  properties.  On  the  other  hand,  there  had  very- 
likely  been  some  depreciation  of  these  properties.  From  vari- 
ous data  obtained  the  Bureau  has  concluded  that  an  allowance 
of  $250,000,000  would  be  sufficient  to  cover  the  total  invest- 
ment in  these  manufacturing  properties  on  April  i,  1901. 
(Only  a  small  addition  had  to  be  made  on  account  of  additional 
securities  issued,  because  these  were  almost  exclusively  for 
other  classes  of  property.) 

That  this  allowance  of  $250,000,000  is  sufficiently  liberal  is 


1  In  the  case  of  this  company  the  preferred  stock  here  given  includes  a  small 
amount  issued  soon  after  the  organization  of  the  company. 


UNITED  STATES   STEEL   CORPORATION    FINANCE      193 

indicated  by  data  furnished  by  the  Steel  Corporati©**^  At  the 
close  of  December,  1907,  the  Steel  Corporation  made  an  ap- 
praisal of  its  assets  (omitted),  in  which  the  manufacturing 
properties  (other  than  the  Gary  plant  and  those  of  the  Tennessee 
Coal,  Iron  and  Railroad  Company)  were  valued  at  $367,600,000, 
This  figure,  according  to  the  Corporation,  represented  the  con- 
struction cost  less  accrued  depreciation  (omitted),  except  for 
real  estate,  which  was  taken  at  the  current  value.  During  the 
period  from  April  i,  1 901,  to  December  31,  1907,  there  had 
been  invested  in  net  capital  additions  to  these  manufacturing 
properties  (again  excluding  the  Gary  and  Tennessee  plants) 
approximately  $1 14,500,000.  Deducting  this  from  the  foregoing 
figure,  gives  an  indicated  investment  in  these  manufacturing 
properties  in  April,  1901,  of  $253,000,000.  This  amount  was 
over  and  above  an  expenditure  of  approximately  $180,000,000 
for  ordinary  maintenance  and  repairs  which,  in  some  cases, 
apparently  included  an  allowance  for  depreciation  although  not 
so  designated. 

The  Corporation's  valuation  of  $367,600,000  at  the  end  of  1907, 
however  (and  consequently  the  resulting  figure  of  $253,000,000 
for  1901),  includes  real  estate  at  values  in  excess  of  those  pre- 
vailing in  1 90 1.  Allowing  for  this  fact,  this  1907  appraisal  of 
the  Corporation  does  not  indicate  a  valuation  for  the  Corpora- 
tion's plants  in  April,  1901,  in  excess  of  $250,000,000. 

Summary  for  Property  other  than  Ore 

The  Bureau's  estimates  of  the  tangible  property  of  the  Cor- 
poration, other  than  ore,  in  1901,  are  therefore  as  follows: 

Manufacturing,  including  blast  furnaces.         .         .         .  $250,000,000 

Transportation         ........  91,500,000 

Coal  and  coke         ....       -^—_,^,-.--       .         .  80,000,000 

Natural  gas     .........  20,000,000 

Limestone       .........  4,000,000 

Working  assets        ........  136,500,000 

Total $582,000,000 

The  total  value  assigned  these  classes  of  property  in  the 
Corporation's  estimate  of  1902  (see  table  omitted),  it  will  be 
observed,    was    roughly    $700,000,000,  or,    after   including    the 


194  TRUSTS,    POOLS   AND   CORPORATIONS 

bonded  indebtedness  of  transportation  properties  and  purchase- 
money  obligations  and  mortgages,  to  make  the  two  estimates 
fairly  comparable,  approximately  $757,000,000.  The  Corpora- 
tion's estimate,  of  course,  included  additions  to  property  made 
from  April  i,  1901,  to  July,  1902.  Nevertheless  the  Corpora- 
tion's estimate  of  its  manufacturing  properties  was  undoubtedly 
excessive.  Except  in  this  instance,  the  Bureau's  valuations  for 
these  classes  of  property  are  not  strikingly  different  from  those 
of  the  Corporation  in  1902. 

Value  of  the  Ore  Property  of  the  Steel  Corporation 

The  ore  valuation  made  by  the  Corporation,  however,  presents 
a  very  different  question.  The  table  on  page  189  shows  that 
the  Corporation  assigned  a  value  of  no  less  than  $700,000,000 
to  its  ore  property,  or  almost  one  half  of  the  total  claimed  for 
all  its  assets.  It  is  evident,  therefore,  that  conclusions  regard- 
ing the  value  of  the  ore  must  largely  govern  opinions  as  to  the 
relationship  between  the  capitalization  and  the  actual  property 
assets  of  the  Steel  Corporation  as  a  whole. 

The  Bureau  has  estimated  the  value  of  this  ore  property  by 
three  different  methods— inrst,  on  the  basis  of  prices  paid  for 
ore  in  fee  shortly  before  the  Corporation  was  organized  ;  second, 
on  the  basis  of  the  price  paid  by  the  Steel  Corporation  itself  for 
a  certain  portion  of  its  ore  property  ;  and,  third,  by  a  calculation 
of  the  "  present  worth  "  of  royalties  on  leased  ore. 

Comparing  the  Bureau's  estimates  of  this  ore  property  by  the 
several  methods  described,  it  will  be  seen,  first,  that  the  current 
prices  of  fee  ore  indicate  that  the  fee  properties  and  leaseholds 
of  the  United  States  Steel  Corporation  were  worth  much  less 
than  $90,000,000 ;  second,  that  the  terms  of  the  purchase  of  the 
Lake  Superior  ConsoHdated  Iron  Mines  indicate  a  total  value 
for  all  the  ore  property  of  the  United  States  Steel  Corporation 
in  1901  of  not  over  $70,000,000  to  $94,000,000;  and,  third,  that 
the  valuation  based  on  present  worth  of  royalties  and  bonus 
values  of  leases  indicates  that  the  same  property  was  worth 
about  $90,000,000. 

Altogether  there  can  be  no  doubt  that  an  estimate  of  from 


UNITED    STATES   STEEL   CORPORATION    FINANCE      195 

^90,000,000  to  $95,000,000  as  the  value  of  this  ore  property 
would  be  sufficiently  high.  Taking  all  the  facts  into  considera- 
tion, however,  the  Bureau  concluded  to  allow  a  round  value  of 
$100,000,000  for  the  ore  property  in  1901. 

It  is  worth  calling  passing  attention  to  the  fact  that  in  the 
year  1902  the  total  valuations,  as  assessed  for  taxation,  of  all 
iron-mining  properties  in  the  States  of  Minnesota  and  Michigan, 
of  which  at  that  time  the  United  States  Steel  Corporation  proba- 
bly owned  not  much  over  one  half,  was  only  about  $54,000,000. 
Practically  all  the  Corporation's  ore  holdings  were  then  in  these 
two  States.  In  other  words,  the  Corporation's  ore  property, 
which,  for  taxation,  was  probably  assessed  at  considerably  less  than 
$40,000,000,  was,  for  the  purpose  of  justifying  its  capitalization, 
valued  at  $700,000,000.  Of  course,  it  is  not  intended  to  say  that 
the  tax  valuations  represented  the  full  value  of  the  property. 

Summary  of  Bureau's  Valuations  by  Departments  of  the 

Business 

The  valuations  for  the  different  classes  of  the  property  of  the 
Corporation  in  1901,  arrived  at  by  the  Bureau  by  this  third 
method,  are  in  the  following  table  summarized  and  compared  with 
those  of  the  Corporation  in  1902,  as  already  given  on  page  189. 

Value  of  Tangible  Assets  Acquired  by  Steel  Corporation  in  1901,  as  com- 
puted BY  Bureau,  compared  with   Estimate  of  Corporation    submitted 
IN  the  Hodge  Suit  in  July,  1902 


Class  of  Property 

Bureau's  Es- 
timate OF  Tan- 
gible Values 
IN   1902 

Corporation's 
Estimate  of 

Tangible  Val- 
ues IN  1902 

Difference 

Ore  property 

Manufacturing   plants,   including  blast 

furnaces 

Railroad,  steamship,  and  dock  property 

Coal  and  coke  property 

Natural-gas  property 

Limestone  properties 

Cash  and  cash  assets 

$100,000,000 

250,000,000 

91,500,000 

80,000,000 

20,000,000 

4,000,000 

136,500,000 

$700,000,000 

348,000,000 
120,340,000 
100,000,000 
20,000,000 
4,000,000 
164,660,000 

$600,000,000 

98,000,000 
28,840,000 
20,000,000 

28,160,000 

Total 

682,000,000 

1,457,000,000 

775,000,000 

196  TRUSTS,    POOLS  AND  CORPORATIONS 

The  total  valuation  of  $682,000,000,  it  will  be  seen,  is  less 
than  one  half  the  value  claimed  by  the  Corporation  in  1902. 
Nevertheless,  in  every  case  the  valuations  of  the  Bureau  are 
believed  to  be  liberal.  As  already  noted,  the  estimates  of  the 
Corporation  include  additions  to  the  property  up  to  July  i, 
1902.  Such  additions,  however,  would  explain  only  an  insignifi- 
cant part  of  the  discrepancy,  and,  in  the  case  of  the  ore,  are 
entirely  negligible. 

It  may  be  repeated  that  the  Bureau's  figures  do  not  allow  for 
any  additional  value  which  may  have  been  imparted  to  these 
properties  by  the  mere  act  of  consolidation.  A  large  part  of 
any  such  addition  is  properly  excluded  from  consideration,  as  it 
must  have  been  due  in  a  measure  to  concentration  of  ownership 
and  control  or  the  restriction  of  competition.  While  the  merger 
of  such  properties,  particularly  on  account  of  greater  integra- 
tion, might  have  imparted  a  considerable  value  to  them  as  going 
concerns  over  and  above  the  aggregate  of  the  valuations  prior 
to  consolidation,  it  is  impossible  to  separate  any  such  increase 
in  value,  due  to  coordination  and  integration,  from  the  increase 
due  to  the  elimination  of  competition,  and  therefore  no  quanti- 
tative statement  of  such  additional  value  has  been  attempted  by 
the  Bureau. 

Comparison  of  Valuations  of  Steel  Corporation's 
Property  in  1901  with  its  Capitalization 

The  Bureau's  valuations  of  the  Steel  Corporation's  property 
in  1 90 1,  arrived  at  by  these  different  methods,  may  now  be  com- 
pared with  its  outstanding  capitalization  at  that  time.  This  is 
done  in  the  table  on  opposite  page. 

It  will  be  seen  at  once  that  the  securities  issued  by  the  Steel 
Corporation  very  greatly  exceeded  the  indicated  value  of  the 
property  acquired,  as  established  by  any  one  of  the  three  meth- 
ods of  valuation.  The  valuation  of  the  tangible  property  arrived 
at  by  historical  study,  as  well  as  that  by  departments  of  the 
business,  shows  an  excess  of  capitalization  greater  than  the 
indicated  value  itself.  The  valuation  by  departments,  namely, 
^2,000,000,  shows  an  excess  of  nearly  $72 1 ,000,000.    Even  tak- 


UNITED   STATES   STEEL   CORPORATION    FINANCE      197 


Comparison  of  Estimates  of  Value  of  Property  of  United   States   Steel 

Corporation  at  its  Organization  in  1901,  with  Par  V<wa;e 

OF  its  Securities 


Excess  of  Se- 
curities OVER 
Estimates 


Total  capitalization  in  April,  1901,'  including  under- 
lying bonds  and  purchase-money  obligations     .      $1,402,846,817 

Investment  in  tangible  property  alone,  indicated  by 

historical  analysis 676,000,000 

Value  of  all  property,  tangible  and  intangible,  as  in- 
dicated by  market  prices  of  securities  of  con- 
stituent concerns 793,000,000 

Value  of  tangible  property  as  estimated  by  depart- 
ments of  the  business 682,000,000 


$726,846,817 

609,846,817 
720,846,817 


ing  the  indicated  market  value  of  the  securities  of  the  subsidiary 
concerns,  namely,  $793,000,000,  which  valuation  includes  the 
public  estimate  for  intangible  considerations  as  well  as  physical 
property,  the  excess  of  the  Steel  Corporation's  capitalization 
was  still  over  $609,000,000.  Naturally  the  valuation  arrived  at 
by  this  method  exceeded  those  obtained  in  the  other  two  cases. 

The  Bureau  does  not  contend  that  the  capitalization  of  the 
Steel  Corporation  should  have  been  fixed  at  any  one  of  the  three 
valuations  here  presented.  All  that  i§  attempted  at  the  mo- 
ment is  to  present  a  comparison  of  these  valuations  with  the 
capitalization.  The  figures  show  clearly  that  the  entire  issue 
of  approximately  $508,000,000  of  common  stock  of  the  Steel 
Corporation  in  1901  had  no  physical  property  back  of  it,  and 
also  a  considerable  fraction,  say  from  one  fifth  to  two  fifths,  of 
the  preferred  stock  was  likewise  unprotected  by  physical  prop- 
erty. Even  granting  that  there  may  have  been  a  considerable 
value  in  intangible  considerations,  it  is  reasonably  clear  that  at 
least  the  entire  issue  of  common  stock,  except  in  so  far  as  what 
may  be  termed  "  merger  value  "  may  be  considered,  represented 
nothing  but  "water." 

While,  therefore,  it  is  not  the  purpose  of  this  report  to  say 
what  should  have  been  the  capitalization  of  the  Steel  Corpora- 
tion, it  is  obvious  that  the  company  was  heavily  overcapitalized, 
judged  by  any  reasonable  standard. 


198 


TRUSTS,    POOLS   AND    CORPORATIONS 


EXCESSIVE    ISSUE    OF   SECURITIES    BY    UNITED    STATES 
STEEL   CORPORATION    IN    1901 

Comparison  of  Bureau's  Valuation  with  Total  Out- 
standing Capitalization 

The  Bureau's  estimates  of  the  value  of  the  investment  of  the 
United  States  Steel  Corporation  at  its  organization  in  April, 
1901,  arrived  at  by  the  three  different  methods  employed — that 
is,  by  analysis  of  the  assets  of  the  constituent  concerns,  by  the 
use  of  market  quotations  of  securities  of  those  concerns,  and  by 
departments  of  the  business  of  the  Corporation  itself  —  may 
now  be  summarized  and  compared  with  the  capitalization  of  the 
Corporation  at  that  time.  Such  a  comparison  is  given  in  the 
following  table : 

Comparison   of  Estimates  of  Value  of  Property  of  United   States   Steel 

Corporation  at  its  Organization  in  1901,  with  Par  Value 

OF  its  Securities 


Total  capitalization  in  April,  1901,  including  underly- 
ing bonds  and  purchase-money  obligations  .     .     $1,402,846,817 

Investment  in  tangible  property  alone,  indicated  by 

historical  analysis 676,000,000 

Value  of  all  property,  tangible  and  intangible,  as 
indicated  by  market  prices  of  securities  of  con- 
stituent concerns 793,000,000 

Value  of  tangible  property  as  estimated  by  depart- 
ments of  the  business 682,000,000 


Excess  of  Se- 
curities OVER 
Estimates 


$726,846,817 

609,846,817 
720,846,817 


The  Bureau's  two  valuations  of  the  tangible  property  alone 
agree  very  closely,  although  to  a  very  considerable  extent  they 
were  arrived  at  independently  of  one  another.  The  valuation 
based  on  market  prices  of  the  securities  of  the  constituent  con- 
cerns naturally  is  higher  than  the  other  two,  since  it  includes 
intangible  considerations  as  well. 

It  will  be  seen  at  once  that  the  capitalization  of  the  Steel 
Corporation  in  1901  greatly  exceeded  the  value  of  the  property 
acquired    as    indicated    by    any    one    of    the    three    methods 


UNITED   STATES   STEEL   CORPORATION    FINANCE      199 

employed.  By  the  first  method,  that  of  historical^analysis  of 
the  organization  of  the  constituent  concerns,  the  excess  of  cap- 
itaHzation  over  tangible  assets  was,  roughly,  $727,000,000.  By 
the  third  method,  which  also  considers  tangible  assets  only,  the 
excess  is  $721,000,000.  Even  on  the  basis  of  the  second 
method,  which,  as  repeatedly  pointed  out,  is  the  public's  esti- 
mate, through  the  stock  market,  of  the  value  of  the  companies 
as  going  concerns  and  which  therefore  includes  intangible  as 
well  as  tangible  assets,  the  excess  is  nearly  $610,000,000. 

Owing  to  the  difficulty,  and,  indeed,  to  the  practical  impossi- 
bility, of  arriving  at  a  valuation  of  the  intangible  assets  of  the 
Corporation  which  would  not  be  influenced  by  the  element  of 
combination  the  Bureau  has  confined  its  study  of  the  investment 
to  tangible  property.  For  this  purpose  it  has  accepted  the  val- 
uation of  $682,000,000  arrived  at  by  the  third  method,  in  the 
manner  already  described  in  the  preceding  chapter.  While,  of 
course,  absolute  precision  cannot  be  claimed  for  this  figure,  it 
was  reached  only  after  very  exhaustive  analysis  ;  moreover,  in 
every  case  the  Corporation  was  given  the  benefit  of  reasonable 
doubt,  so  that  this  result  must  be  regarded  as  distinctly  a  hberal 
valuation  of  the  tangible  property  of  the  Corporation  in  1901. 
On  this  basis,  no  less  than  $720,846,000  of  the  total  capitaliza- 
tion of  the  Corporation  was  unprotected  by  tangible  property 
values ;  that  is  to  say,  the  entire  issue  of,  roughly,  $508,000,000 
of  common  stock  and  over  $212,000,000  of  the  preferred  stock 
had  no  tangible  property  back  of  it  at  the  organization  of  the 
Corporation  in  1901. 

In  this  connection  it  may  be  noted  that  in  testimony  before 
the  Ways  and  Means  Committee,  in  1908,  E.  H.  Gary,  chairman 
of  the  Steel  Corporation,  was  questioned  with  respect  to  a  valu- 
ation of  $1,782,187,383  for  the  properties  of  the  Steel  Corpora- 
tion at  the  close  of  1907.  An  excerpt  from  his  testimony  before 
that  committee  follows : 

Mr.  Cockran.  Of  this  whole  sum  of  $1,782,000,000,  was  not 
$1,000,000,000,  at  least,  capitaUzed  profits  as  distinguished  from 
original  investment  ? 

Mr.  Gary.  I  should  have  to  guess  at  that ;  but  I  should  guess 
yes,  including  increases  in  value. 


200  TRUSTS,    POOLS   AND    CORPORATIONS 

While  an  offhand  answer  to  such  an  important  question 
should  not  be  given  too  much  weight,  the  resulting  valuation 
of,  say,  $782,000,000  for  the  properties  at  the  time  the  Steel 
Corporation  was  formed  is  surprisingly  in  line  with  the  valua- 
tion of  the  Bureau  already  given. 

The  Bureau  does  not  for  the  purposes  of  the  present  discus- 
sion take  up  the  question  whether  the  Steel  Corporation  should 
have  issued  securities  up  to  only  the  value  of  the  tangible  prop- 
erty, as  here  estimated.  As  previously  pointed  out,  opinions 
concerning  the  proper  basis  of  capitalization  are  very  diverse. 
The  Bureau  is  not  concerned  at  the  moment  with  the  question 
of  what  would  be  the  best  method  of  capitalization,  but  with 
the  relation  between  the  capitalization  actually  determined 
upon  and  the  value  of  the  investment  represented  thereby.  The 
question  of  the  principles  of  capitalization  is  one  of  great  gen- 
eral interest,  but  in  this  present  discussion  the  Bureau  is  dealing 
only  with  the  question  of  fact.  On  this  point,  as  already 
stated,  it  is  clear  that  there  was  an  excess  of  more  than 
;^700,ooo,ooo  of  capitalization  over  the  actual  investment  in 
tangible  property  in  1901.  Even  granting  that  there  may  have 
been  a  considerable  value  in  the  intangible  considerations,  it  is 
reasonably  clear  that  at  least  the  entire  issue  of  common  stock, 
setting  aside  all  "  merger  value,"  represented  nothing  buf "  water." 

While,  therefore,  it  is  not  the  purpose  of  this  report  to  say 
what  should  have  been  the  capitalization  of  the  Steel  Corpora- 
tion, it  is  obvious  that  the  company  was  heavily  overcapitalized, 
judged  by  any  method  of  valuing  its  assets. 

Comparison    of    Par   Value  of  Securities  of  Steel  Cor- 
poration  ITSELF   WITH   THEIR    MARKET   VaLUE 

Incidentally  it  is  well  to  consider  briefly  the  aggregate  mar- 
ket value  of  the  securities  of  the  Steel  Corporation  itself.  But 
it  must  be  clearly  recognized  that  this  is  in  no  sense  a  part  of 
the  previous  discussion  of  the  value  of  its  assets,  because  such  a 
computation  introduces  a  wholly  new  factor,  namely,  the  merger 
value  given  to  the  properties  by  the  very  act  of  combining  them 
under  a  single  great  concern,  and  other  intangible  considerations. 


UNITED   STATES   STEEL   CORPORATION    FINANCE      201 

The  average  price  at  which  United  States  Steel  preferred 
stock  sold  during  the  first  year  of  the  existence  of  t+fe' Corpora- 
tion— this  average  being  based  on  an  average  of  the  means  of 
the  highest  and  lowest  quotations  daily — was  94,  and  the  cor- 
responding average  for  the  common  stock  was  44.  The  average 
price  of  the  5  per  cent  fifty-year  bonds  was  approximately  115. 
The  average  price  of  the  underlying  bonds,  mortgages,  and 
purchase-money  obligations  cannot  be  satisfactorily  determined. 
Since  transactions  in  some  of  these  were  very  infrequent,  and 
in  some  cases  there  were  no  recorded  transactions,  and  since 
the  total  amount  of  these  was  comparatively  small,  they  may  be 
reckoned  at  par,  as  they  have  been  in  preceding  tables  of  this 
sort. 

Applying  these  average  prices  to  the  total  outstanding  cap- 
itaHzation  of  the  Steel  Corporation  (including  underlying  bonds, 
mortgages,  and  purchase-money  obligations)  at  the  time  of  its 
organization,  the  indicated  market  valuation  of  these  securities 
was  approximately  $1,133,144,631,  as  shown  by  the  following 
table : 

Comparison  of  Par  Value  of  Steel  Corporation's  Securities  with  Market 

Value,  Based  on  Average  Prices  for  the  First  Year 

after  its  Organization 


Security 

Par  Value 

Average 
Price 
First 
Year 

Market  Value 

Based  on 

Average  Price 

First  Year 

Excess  of 

Par  Value 

Over  Market 

Value 

Preferred  stock 

Common  stock 

5  per  cent  bonds 

Underlying  bonds,  mortgages, 
and  purchase-money  ob- 
ligations     

;?5 10,205,743 

508,227,394 
303,450,000 

80,963,680 

94 

44 

"5 

100 

^479.593.398 
223,620,053 
348,967,500 

80,963,680 

^30,612,345 

284,607,341 

45->5'7^500 

Total 

1,402,846,817 

1,133,144,631 

269,702,186 

The  par  value  of  the  Steel  Corporation's  securities,  therefore, 
shows  an  excess  over  the  market  valuation  of  $269,700,000. 
Had  the  fifty-year  bonds  been  taken  at  par  instead  of  at  the 


202  TRUSTS,    POOLS   AND    CORPORATIONS 

market  value  (which  method  might  be  justified  on  the  ground 
that  the  premium  was  largely  influenced  by  the  term  of  these 
bonds,  and  the  condition  of  the  money  market  rather  than  by 
property  values),  the  excess  would  have  been  about  $3 1 5,000,000. 

It  should  be  unnecessary,  however,  to  argue  that  a  market 
valuation  based  upon  the  prices  of  the  securities  of  the  Steel 
Corporation  itself  is  not  a  proper  criterion  by  which  to  judge 
the  real  value  of  the  assets  of  the  Corporation  at  its  organiza- 
tion. It  will  be  remembered  that  it  was  shown  that  the  market 
valuation  of  the  securities  of  the  constituent  concerns  acquired 
by  the  Steel  Corporation  based  upon  the  average  prices  of  1899 
and  1900  (and  including  $25,003,000  new  cash  capital  as  well 
as  underlying  indebtedness  at  par)  was  $792,961,970.  The 
market  value  of  the  securities  of  the  Steel  Corporation  itself 
based  upon  the  average  prices  recorded  during  the  first  year  of 
its  operation  (except  for  the  underlying  indebtedness,  which  is 
taken  at  par)  is  $1,133,144,631,  or  $340,182,661  more  than 
the  market  valuation  of  the  securities  acquired  in  the  component 
concerns  in  1899  and  1900. 

It  is  apparent,  therefore,  that  the  aggregate  market  valuation 
was  greatly  increased  as  a  direct  result  of  the  merger  of  these 
various  constituent  concerns  under  a  single  control.  Un- 
doubtedly much  of  this  increase  in  market  valuation  was  in  the 
nature  of  an  increase  due  to  concentrated  control  over  the  in- 
dustry. It  is  incredible  that  there  had  been  any  such  enormous 
increase  in  the  real  value  of  the  property  in  this  short  interval. 
A  part  of  the  increase  was  undoubtedly  a  temporary  reflection 
of  current  conditions  in  the  stock  market.  The  year  1901  was 
one  of  marked  prosperity  in  the  steel  industry,  and  despite 
the  acute  stock-market  panic  which  occurred  in  May  it  was 
a  year  of  firm  and  even  of  rising  values  for  securities  in  general. 
The  stocks  of  the  Steel  Corporation,  moreover,  undoubtedly 
were  given  support  by  large  banking  interests  during  the 
greater  part  of  the  organization  period.  In  view  of  these 
facts,  and  more  especially  the  fact  that  the  Steel  Corporation 
was  a  consolidation  controlling  a  very  substantial  proportion  of 
the  steel  business  of  the  country,  this  market  valuation  of  its 
securities  of  approximately  $1,133,000,000  obviously  exaggerates 


UNITED   STATES   STEEL  CORPORATION    FINANCE     203 

a  fair  valuation  of  the  properties  aequired  as  they  existed  under 
separate  ownership.  Nevertheless,  even  judged  by  This  unduly 
favorable  standard,  the  capitalization  of  the  Corporation  was 
very  excessive. 

It  may  be  noted  in  this  connection  that  in  the  latter  part 
of  1903  and  the  early  part  of  1904,  during  a  sharp  reaction  in 
the  steel  industry,  the  market  value  of  its  securities  was  very 
greatly  reduced.  Thus  the  preferred  stock  in  1903  sold  as  low 
as  49|,  and  the  common  stock  as  low  as  10  (the  latter  sold 
somewhat  lower  in  1904).  The  fifty-year  bonds  sold  as  low  as 
102,  while  the  new  10-60  year  bonds,  which  were  issued  in  that 
year  chiefly  to  retire  preferred  stock,  sold  as  low  as  65.  At 
these  low  prices  (including  underlying  indebtedness  at  par  in  the 
absence  of  quotations),  the  total  market  value  of  the  securities 
of  the  Corporation  was  only  about  $751,000,000,  or  $382,000,000 
less  than  the  aggregate  value  shown  by  the  1901  prices. 

The  Bureau  does  not  contend  that  this  valuation  at  these  low 
prices  is  a  fair  indication  of  the  real  value  of  the  property  at 
that  time,  but  this  figure  illustrates  the  danger  of  using  stock- 
market  quotations  as  a  conclusive  test  of  values  unless  averaged 
over  a  long  period  under  varying  conditions.  On  the  other 
hand,  such  stock-market  prices,  when  averaged  over  long  periods, 
frequently  are  an  exceedingly  valuable  criterion. 


Evidence  of   Overcapitalization  in   Excessive   Issue  of 
Stock  to  Underwriting  Syndicate 

Very  convincing  evidence  of  an  excessive  issue  of  securities 
by  the  Steel  Corporation  is  afforded  by  the  enormous  payment 
which  it  allowed  the  underwriting  syndicate,  so  called.  The 
syndicate  agreement  provided  that  in  addition  to  undertaking  to 
secure  at  least  51  per  cent  of  the  stocks  of  the  various  companies 
originally  to  be  acquired,  the  syndicate  should  furnish  the  Steel 
Corporation  with  $25,000,000  cash  capital.  In  addition  to  this 
sum,  the  syndicate  incurred  expenses  of  about  $3,000,000  at- 
tendant upon  the  organization  of  the  Corporation,  through  fees, 
purchase  of  miscellaneous  securities,  etc.,  which  sum  should  be 


204  TRUSTS,   POOLS  AND   CORPORATIONS 

added  to  the  ^25,000,000  cash  capital  provided,  in  stating  the 
total  cash  consideration  provided  by  the  syndicate.  For  this 
total  cash  consideration  of  $28,000,000  and  its  services  the 
underwriting  syndicate  received  from  the  Steel  Corporation  the 
enormous  total  of  practically  1,300,000  shares  of  its  stock  (half 
preferred  and  half  common),  of  an  aggregate  par  value  of 
$130,000,000.  That  this  huge  block  of  •  stock  was  actually 
received  by  the  syndicate  was  explicitly  stated  in  the  prelimi 
nary  report  of  the  Steel  Corporation,  which,  after  giving  the 
amounts  of  stock  issued  to  acquire  the  securities  of  the  constitu- 
ent concerns,  further  stated : 

The  residue  of  the  common  and  preferred  stock  of  this  Corporation 
delivered  to  the  syndicate  under  the  contract  of  March  i,  190 1,  and 
not  used  for  the  acquisition  by  it  of  the  stocks  of  the  specified  com- 
panies, behig  the  shares  which,  as  stated  in  the  syndicate  circular  of 
March  2,  1901,  were  to  be  retained  by  and  to  belong  to  the  syndicate, 
amounted  to  649,987  shares  of  preferred  stock,  and  649,988  shares  of 
common  stock.  This  residue  of  stock  or  the  proceeds  thereof,  after 
reimbursing  the  syndicate  the  $25,000,000  in  cash  which  it  paid  to  the 
Corporation,  and  approximately  $3,000,000  for  other  syndicate  obliga- 
tions and  expenses,  constituted  surplus  or  profit  of  the  syndicate. 

Profit  Realized  from  this  Stock  by  the  Syndicate.  —  This  enor- 
mous "residue,"  as  it  was  termed,  yielded  a  very  large  profit  to 
the  syndicate.  At  valuations  of  44  for  the  common  stock  and 
94  for  the  preferred  stock  (the  average  prices,  respectively,  at 
which  these  shares  sold  during  the  first  year  after  the  organiza- 
tion of  the  Steel  Corporation),  the  total  value  of  these  stocks 
thus  delivered  to  the  syndicate  would  have  been  approximately 
$89,700,000.  As  a  matter  of  fact,  it  appears  that  the  amount 
actually  realized  by  the  syndicate  was  about  $90,500,000. 
After  reimbursing  the  syndicate  for  the  $25,000,000  cash 
capital  raised  by  it,  and  also  for  the  $3,000,000  incurred  in 
expenses,  the  syndicate  managers  paid  out  in  profits  to  syndicate 
members  substantially  $50,000,000.  Before  distributing  these 
huge  profits,  however,  J.  P.  Morgan  &  Co.,  as  syndicate  man- 
agers, reserved  as  their  compensation  20  per  cent  of  the  total 
profits.     The  total  profits  consequently  were  one  fourth  greater 


UNITED    STATES   STEEL   CORPORATION    FINANCE      205 

than  the  amount  thus  distributed  to  syndicate  mcijulicrs,  or,  in 
other  words,  they  were,  roughly  speaking,  $62,500,000. 

It  may  be  noted  that  about  $4,000,000  of  this  total  was  not  in 
the  form  of  cash.  After  reimbursing  the  syndicate  for  its  cash 
obligations  of  $28,000,000,  the  syndicate  managers  paid  four 
cash  dividends  of  $10,000,000  each  (after  reserving  in  each 
case  their  20  per  cent  commission),  and  a  final  dividend  of 
$6,000,000  in  cash  plus  $4,000,000  paid-up  participation  in  a 
syndicate  then  being  organized  by  J.  P.  Morgan  &  Co.  to  under- 
write the  so-called  "  bond  conversion  "  scheme  of  the  Corporation, 
discussed  elsewhere.  There  is  some  question  whether  this 
$4,000,000  participation  in  the  second  syndicate  realized  its  par 
value  on  the  liquidation  of  that  syndicate,  but  any  difference 
between  the  amount  finally  realized  and  the  par  value  ($4,000,000) 
was  undoubtedly  so  small  that  it  can  be  disregarded.  The  profit 
on  this  operation  over  and  above  all  expenses  may  therefore  be 
fairly  stated  at  $62,500,000. 

There  can  be  no  question  that  this  huge  compensation  to  the 
syndicate,  or,  in  other  words,  the  enormous  block  of  stock  upon 
which  this  profit  was  realized,  was  greatly  in  excess  of  a 
reasonable  compensation.  The  syndicate  was,  of  course,  prop- 
erly to  be  reimbursed  not  only  for  the  $25,000,000  new  cash 
capital  which  it  provided  the  Corporation,  and  for  the  $3,000,000 
of  expenses  incurred,  but  was  also  entitled  to  some  compensation 
for  the  labor  and  risk  of  raising  these  sums.  Moreover  the 
syndicate  presumably  rendered  some  other  services  of  value  in 
facilitating  the  organization  of  the  Corporation  and  the  flotation 
of  its  securities,  for  which  it  would  reasonably  expect  some  com- 
pensation. However,  these  services  certainly  were  not  worth 
anything  like  the  enormous  price  which  the  Corporation  paid. 
Nor  can  this  payment  be  justified  on  the  ground  of  extraordinary 
risk.  The  Corporation  was  organized  at  a  time  of  pronounced 
buoyancy  in  the  stock  market  and  decided  prosperity-  in  the 
steel  industry.  It  is  true  that  only  a  short  time  after  its 
organization  the  famous  Northern  Pacific  corner  and  the  result- 
ing stock-market  panic  occurred.  Such  a  contingency,  however, 
is  one  of  the  possibilities  that  all  underwriting  syndicates  have 
to  take  account  of,  and  was  entitled  to  no  more  weight  in  this  case 


2o6  TRUSTS,    POOLS   AND    CORPORATIONS 

than  in  the  case  of  numerous  other  underwriting  arrangements 
which  were  made  by  other  large  corporations  at  the  same  period. 

It  is,  moreover,  true  that  the  nominal  liability  of  the  syndi- 
cate, or  what  may  be  called  its  nominal  capital,  was  $200,000,000. 
This,  however,  was  the  liability  of  the  syndicate  subscribers  to 
the  syndicate  managers  and  not  to  the  Steel  Corporation,  to 
which  its  cash  liability,  as  just  shown,  was  only  $25,000,000  (not 
including  $3,000,000  of  expenses).  It  was  the  understanding, 
tacit  or  expressed,  that  the  syndicate  managers  did  not  expect 
to  call  upon  the  syndicate  subscribers  for  more  than  a  single  pay- 
ment of  12^  per  cent  of  the  total  nominal  liability  ($200,000,000), 
or  $25,000,000.  As  a  matter  of  fact,  that  was  the  only  call 
actually  made.  Had  a  further  call  been  made  upon  the  syndi- 
cate subscribers,  this  would  have  been  to  meet  temporary  exigen- 
cies accompanying  the  flotation  of  the  Steel  Corporation's  stock, 
and  not  to  make  any  further  payment  to  the  Corporation  itself. 
The  large  nominal  obligation  of  the  syndicate  subscribers  to  the 
syndicate  managers  apparently  was  determined  upon  in  part 
with  a  view  to  disarming  subsequent  criticism  of  the  enormous 
compensation  which  it  received. 

A  very  important  consideration  to  point  out  is  that  while  the 
syndicate  was,  from  the  standpoint  of  the  prestige  and  reputation 
of  the  bankers  identified  with  it,  nominally  compelled  to  see  the 
organization  of  the  Steel  Corporation  successfully  through,  there 
was  no  legal  obligation  of  this  sort  whatever.  Instead,  a  circular 
of  the  syndicate  managers  to  the  stockholders  of  the  various 
constituent  concerns  which  were  to  be  acquired  stated  very 
positively  that  the  syndicate  managers  might  at  any  time  wholly 
abandon  the  transaction,  in  which  event  the  stockholders  in  the 
acquired  companies  would  have  no  claim  whatever  against  the 
syndicate  managers.  This  is  shown  by  the  fourth  paragraph  in 
the  official  circular  of  J.  P.  Morgan  &  Co.,  the  syndicate 
managers,  as  follows  : 

The  undersigned  are  authorized  to  proceed  with  the  proposed  trans- 
action whenever  in  their  sole  judgment  a  sufficient  amount  of  the 
stocks  of  said  companies,  or  any  of  them,  shall  have  been  deposited. 
They  reserve  the  right,  at  any  time,  in  their  discretion,  to  wholly  abandon 
the  transaction  and  to  withdraw  their  offer  herein  contained,  as  to  all 


UNITED    STATES   STEEL   CORPOKATION    FINANCE     207 

the  depositors,  by  publication  of  notice  of  such  withdrawal  in  two  daily 
newspapers  in  the  city  of  New  York ;  and  in  that  event  a-tKthe  depos- 
ited shares  shall  be  returned  without  charge  upon  surrender  of  the 
respective  receipts  therefor.  In  case  of  any  such  withdrawal  of  the 
offer  hereunder  as  to  all  or  to  any  depositors,  such  depositors  shall  have 
no  claim  against  the  undersigned,  and  shall  only  be  entitled  to  receive 
their  deposited  securities  upon  surrender  of  the  respective  receipts 
therefor.^ 

It  may  be  objected,  as  just  suggested,  that  it  is  almost  incredible 
that  the  syndicate  managers  would  abandon  the  transaction. 
Nevertheless,  this  distinct  provision  that  they  might  do  so  if  they 
saw  fit,  without  giving  any  explanation  and  without  rendering 
themselves  in  the  slightest  way  liable,  clearly  is  entitled  to  great 
weight  in  judging  the  risks  assumed  by  the  syndicate.  As  a 
matter  of  fact,  as  the  sequel  showed,  the  syndicate  was  compelled 
to  bear  only  a  very  moderate  risk,  while  it  was  one  of  the  most 
profitable  ever  organized  in  the  United  States. 

It  is  worth  passing  notice  that  J.  P.  Morgan  &  Co.,  the  syndi- 
cate managers,  in  the  closing  paragraph  of  their  circular  to  the 
shareholders,  said: 

It  is  proper  to  state  that  J.  P.  Morgan  &  Co.  are  to  receive  no  com- 
pensation for  their  services  as  syndicate  managers  beyond  a  share  in 
any  sum  which  ultimately  may  be  realized  by  the  syndicate. 

As  just  shown,  however,  the  share  of  J.  P.  Morgan  &  Co.  in 
the  profits  of  the  syndicate,  as  syndicate  managers  only,  was 
about  $12,500,000,  in  addition  to  whatever  profits  they  may 
have  made  because  of  their  participation  in  the  syndicate  as 
subscribers.  In  view  of  this  profit,  it  is  hardly  remarkable  that 
that  firm  received  no  further  payment  from  the  Steel  Corpora- 
tion itself. 

In  this  connection  it  is  also  proper  to  point  out  that  the 
syndicate  managers  were  prominently  identified  with  the  man- 
agement of  several  of  the  companies  acquired  by  the  Steel  Cor- 
porations, and  also  with  the  management  of  that  Corporation 
itself.  Three  partners  of  the  firm  were  on  the  directorate  of 
the  Corporation,  one  of  whom  was  also  chairman  of  the  finance 

1  Italics  by  Bureau. 


208  TRUSTS,    POOLS   AND    CORPORATIONS 

committee.  Moreover,  several  other  leading  interests  in  the 
underwriting  syndicate  were  the  heads  of  some  of  the  companies 
acquired  and  members  of  the  first  board  of  directors  of  the  Cor- 
poration. In  other  words,  as  managers  of  the  Steel  Corporation, 
these  various  interests  virtually  determined  the  compensation  for 
their  services  as  underwriters. 

It  may  also  be  stated  that  in  January,  1902,  the  syndicate 
managers  proposed  that  a  formal  agreement  of  release  be  exe- 
cuted between  themselves  and  the  Steel  Corporation  concerning 
this  syndicate  operation.  The  following  proposition  was  sub- 
mitted to  the  finance  committee  of  the  Steel  Corporation  by  the 
syndicate  managers  : 

The  magnitude  of  the  transactions,  and  the  immense  amount  in- 
volved under  the  contracts  of  March  i,  1901,  and  April  i,  1901,  render 
it  important,  and  it  is  our  desire,  that  all  matters  between  the  Corpora- 
tion and  ourselves,  as  syndicate  managers  or  otherwise,  relating  in 
any  way  to  the  issue  of  the  capital  stock  of  your  Corporation  and  to 
the  acquisition  of  the  stocks  of  other  companies,  should  be  definitely 
closed  and  settled  in  such  manner  that  no  possible  question  concern- 
ing the  same  or  the  amounts  or  profits  involved  can  be  raised  in  the 
future.  We  desire,  if  practicable,  that  such  a  final  settlement,  which 
it  seems  to  us  should  be  by  way  of  mutual  releases,  be  had  before  we 
distribute  the  profits  of  the  syndicate  among  its  members. 

Such  an  arrangement  was  entered  into  and  formally  approved 
by  the  directors  of  the  Steel  Corporation  on  February  14,  1902. 
At  that  time,  it  may  be  noted,  the  profits  of  the  syndicate  were 
•estimated  by  the  syndicate  managers  at  about  $56,000,000. 
This  proved  to  be  an  underestimate,  and,  as  above  shown,  the 
total  profits  actually  reaUzed  were  about  $62,500,000. 

In  addition  to  the  importance  of  this  payment  to  the  under- 
writing syndicate  itself  as  indicating  overcapitalization,  this 
transaction  may  also  fairly  be  given  weight  in  discussing  evi- 
dence of  excessive  issue  of  securities  with  respect  to  the  purchase 
of  properties.  A  corporation  which  issued  roughly  $1 30,000,000 
of  its  securities  for  a  cash  consideration  of  $25,000,000  plus 
such  underwriting  and  promotion  services  and  expenses  as  were 
involved  in  this  case  may  fairly  be  regarded  as  disposed  to  issue 
its  capital  stock  on  an  exceedingly  liberal  basis  for  the  acquisi- 


UNITED   STATES   STEEL   CORPORATION    FINANCE     209 

tion  of  properties.  This  syndicate  arrangement,  therefore,  may 
properly  be  construed  as  confirming  other  evidence  that  the 
capitaUzation  of  the  Corporation  far  exceeded  the  true  value  of 
its  assets. 

At  the  invitation  of  the  Bureau,  the  syndicate  managers  in 
191 1  submitted  a  statement  concerning  this  compensation  of  the 
syndicate.     Their  statement  on  this  point  follows  : 

As  stated  in  the  first  preUminary  report  of  this  company,  submitted 
to  its  stockholders  at  the  first  annual  meeting  upon  February  17,  1902, 
and  then  and  there  unanimously  approved,  there  was  allowed  to  the 
underwriting  syndicate  as  its  compensation  649,987  shares  of  the  pre- 
ferred stock  and  649,988  shares  of  the  common  stock  of  the  new  cor- 
poration, out  of  which  the  syndicate  provided  the  corporation  with 
$25,000,000  cash  and  distributed  approximately  $3,000,000  for  other 
syndicate  obligations  and  expenses. 

We  enclose  a  copy  of  the  printed  syndicate  agreement  of  February 
26,  1901,  under  which  the  net  profits  of  the  syndicate  were  distribut- 
able, and  they  were  distributed  one  fifth  to  the  syndicate  managers 
and  the  remaining  four  fifths  to  the  syndicate  subscribers,  including 
our  firm. 

Inasmuch  as  these  commissions  and  their  payment  were  unanimously 
approved  by  the  stockholders  of  the  corporation,  we  should  assume 
that  your  view  (which  we  regret)  that  they  were  excessive  in  amount 
has  regard,  not  to  the  parties  immediately  concerned,  but  to  what  you 
may  consider  to  be  a  public  interest.  In  this  aspect  it  would  seem  to 
us  that,  if,  as  we  believe,  and  as  we  have  above  stated,  the  properties 
acquired  by  the  Steel  Corporation  were  and  are  fully  worth  the  par  of 
the  entire  block  of  securities  by  it  issued  to  the  syndicate  managers 
in  payment  therefor,  no  public  injury  could  or  would  result  from  any 
subdivision  between  the  syndicate  managers  and  their  associates  of 
the  securities  so  issued. 

We  would  suggest  further  that,  as  the  transaction  was  unique,  not 
only  in  character,  but  in  immensity,  it  is  possible  that  any  standard 
short  of  that  furnished  by  practical  experience  of  necessity  must  be 
imaginary  and  perhaps  illusory.  Contingencies  and  reasons  involved 
in  this  so  large  a  transaction  require  and  justify  compensation  at  a 
rate  which  in  lesser  matters  might  seem  excessive.  No  ordinary  ex- 
perience can  supply  a  measuring  stick  for  either  the  purchase  price  of 
the  properties  of  the  new  corporation  or  the  payment  of  the  compensa- 
tion for  such  acquisition. 


210  TRUSTS,    POOLS   AND   CORPORATIONS 

We  would  call  attention  also  to  the  fact  that  the  purchase  price  of 
the  properties  transferred  under  the  first  contract  of  March  i,  1901, 
covered  the  entire  compensation  received  by  the  syndicate.  The 
subsequent  acquisition  under  the  contract  of  April  i,  1901,  of  the  so- 
called  Rockefeller  properties,  the  Pittsburg  Steamship  Company,  and 
the  Oliver  Iron  Mining  Company  were  made  by  the  syndicate  managers 
not  on  their  own  account  but  for  and  in  behalf  of  the  new  company, 
the  United  States  Steel  Corporation,  and  no  commissions  or  compen- 
sation for  this  acquisition  was  asked  or  received  by  the  syndicate 
managers. 

The  Bureau  does  not  regard  the  above  statement  as  an  ade- 
quate defense  of  the  enormous  commission  obtained  by  this 
underwriting  syndicate.  Undoubtedly  the  transaction  was  ex- 
ceptional with  respect  to  magnitude.  This  would  undoubtedly 
justify  a  larger  commission  in  the  aggregate  than  would  be 
justified  in  the  case  of  a  very  small  underwriting  operation. 
Moreover,  the  magnitude  of  the  operation  might  justify  a  some- 
what greater  allowance  for  contingencies,  although,  as  already 
pointed  out,  every  underwriting  syndicate  must  run  the  risk  of 
certain  contingencies,  such,  for  instance,  as  a  violent  disturbance 
in  the  stock  market,  or,  on  the  other  hand,  a  period  of  continued 
depression.  So  far  as  the  above  explanation  of  the  syndicate 
payment  rests  on  the  assumption  that  the  properties  were  worth 
the  par  value  of  the  entire  amount  of  stock  issued  therefor,  it  is 
obvious  that  this  view  cannot  be  accepted.  As  a  matter  of 
fact,  if  the  properties  themselves  were  regarded  by  the  vendors 
as  worth  par,  it  cannot  be  conceded  that  those  vendors  would 
have  been  willing  to  surrender  $130,000,000  of  the  entire  capital 
stock  to  an  underwriting  syndicate,  except  on  the  ground  that 
they  expected  to  make  such  extraordinary  profits  out  of  the 
merger  that  they  would  thereby  be  reimbursed.  In  any  event, 
it  is  obvious  that  any  such  large  commission  to  an  underwriting 
syndicate  is  a  matter  of  vital  importance  from  a  public  stand- 
point. 

It  may  be  noted  that  this  statement  of  the  syndicate  managers 
calls  attention  to  the  fact  that  the  entire  commission  was  allowed 
under  the  first  contract,  which  did  not  include  the  acquisition  of 
the  Rockefeller  properties  (the  Lake  Superior  Consolidated  Iron 


UNITED   STATES   STEEL   CORPORATION    FINANCE     21 1 

Mines  and  the  Bessemer  Steamship  Company),  the^merican 
Bridge  Company,  and  the  one  sixth  interest  in  the  Oliver  Iron 
Mining  Company  and  in  the  Pittsburg  Steamship  Company,  but 
that  no  compensation  was  received  by  the  syndicate  managers 
for  these  later  acquisitions.  This  simply  means,  however,  that 
this -syndicate  commission  covered  the  acquisition  of  only  a  part 
of  the  properties  of  the  Steel  Corporation.  It  may  be  noted  in 
this  connection  that  the  second  syndicate  agreement  —  that  of 
April  I,  1 90 1  (a  copy  of  this  agreement  appears  on  pages  omitted) 
—  contained  a  provision  that  the  Steel  Corporation,  in  addi- 
tion to  reimbursing  J.  P.  Morgan  &  Co.  for  actual  expenditures 
incurred  in  the  acquisition  of  these  properties  thus  subsequently 
brought  in,  should  pay  that  firm  "  fair  compensation  for  their 
services."  While,  according  to  the  above  statement,  no  such 
compensation  was  received  under  this  second  contract,  this 
can  hardly  be  regarded  as  remarkable,  in  view  of  the  fact 
that  the  compensation  under  the  first  contract  netted  the  syn- 
dicate the  enormous  sum  of  roughly  ^62,500,000,  of  which 
the  syndicate  managers  received  one  fifth,  this  not  mcluding 
any  amount  which  they  may  have  received  as  members  of  the 
syndicate. 

Summary  of   Underwriting  Commissions  in  the  Organiza- 
tion OF  THE  Steel  Corporation  and  its  Constituent 

Concerns 

Another  way  of  looking  at  this  large  compensation  to  the 
underwriting  syndicate  is  that  ^28,000,000  of  the  preferred  and 
$28,000,000  of  the  common  stock  were  issued  to  cover  the  $28,- 
000,000  cash  liability  and  expenses  of  the  syndicate,  the  com- 
mon stock  being  regarded  as  a  100  per  cent  bonus  with  the 
preferred,  as  was  so  often  done  in  organizing  the  constituent 
concerns.  On  this  basis  there  would  be  left  $36,998,700  of 
preferred  stock  and  $36,998,800  of  common  stock  as  a  "com- 
mission "  in  the  strict  sense,  merely  for  the  services  of  the  un- 
derwriting syndicate  as  distinct  from  any  cash  consideration  or 
expense. 

This  enormous  commission  to  the  underwriting  syndicate  of 


212  TRUSTS,    POOLS   AND   CORPORATIONS 

the  Steel  Corporation,  it  will  be  recalled,  followed  other  heavy 
commissions  of  the  same  sort  paid  by  most  of  the  constituent 
concerns  of  the  Corporation.  The  facts  concerning  the  pay- 
ments of  such  commissions  by  the  subsidiary  companies  have 
already  been  summarized  in  Chapter  II.  It  was  there  shown 
that  the  total  amount  of  stock  issued  by  seven  of  the  constituent 
concerns  (this  not  including  the  American  Sheet  Steel  Company 
or  the  Shelby  Steel  Tube  Company)  as  commissions  to  pro- 
moters of  underwriting  syndicates,  exclusive  of  bonus  stock 
issued  for  property  or  cash,  aggregated  no  less  than  $63,306,- 
811,  of  which  $62,449,612  was  common  stock  and  $857,199  was 
preferred. 

The  amounts  of  stock  thus  issued  as  commissions  by  the  sub- 
sidiary companies  received,  of  course,  the  same  terms  of  exchange 
in  the  acquisition  of  these  concerns  by  the  Steel  Corporation  as 
the  other  stocks  of  the  same  class.  As  already  shown  the  rates 
of  exchange  in  most  instances  were  at  more  than  par.  By  add- 
ing the  amounts  of  United  States  Steel  Corporation  stock  thus 
issued  in  exchange  for  these  amounts  of  the  stock  of  the  con- 
stituent companies  which  were  originally  issued  for  commissions 
to  the  amount  of  the  Steel  Corporation's  stock  above,  which 
may  be  regarded  as  such  a  commission  in  the  strict  sense  (after 
deducting  $28,000,000  of  each  class  to  cover  the  cash  raised  or 
expended  by  the  syndicate),  a  total  is  reached  which  may  be 
regarded  as  the  amount  of  the  Steel  Corporation's  stock  issued 
directly  or  indirectly  for  promotion  and  organization  profits.  A 
summary  of  such  total  commissions  is  given  in  the  table  on 
opposite  page. 

From  this  table  it  appears,  therefore,  that  more  than  $150,- 
000,000  of  the  stock  of  the  Steel  Corporation  (this  including 
over  $41,000,000  of  preferred  stock  and  $109,000,000  of  common 
stock)  was  issued,  either  directly  or  indirectly  (through  exchange), 
for  mere  promotion  or  underwriting  services.  This  total,  more- 
over, as  noted,  does  not  include  anything  for  the  American 
Sheet  Steel  Company,  although  presumably  a  large  commission, 
possibly  including  some  preferred  stock,  was  obtained  by  the 
promoters  of  this  concern,  nor  is  anything  added  in  the  case  of 
the  Shelby  Steel  Tube  Company. 


UNITED  STATES   STEEL  CORPORATION    FINANCE     213 

Amount  of  Steel  Corporation's  Stock  Issued  as  a  Commission  tj^JHe  Under- 
writing Syndicate,  and  Amounts  so  Issued  in  Exchange  for  Stocks  of 
Constituent  Concerns  Issued  for  the  Same  Purposes,  Excluding  in  All 
Cases  Stock  Issued  as  a  Bonus  for  Property  or  for  Cash 


Company 


Amount 
OF  Stock 
Issued  to 
Cover  Pro- 
motion 
Charges 


Federal  Steel  Company : 

Preferred 

Common 

American  Steel  and  Wire  Com- 
pany, common 

American  Tin  Plate  Company, 
common 

National  Steel  Company,  common 

American  Steel  Hoop  Company, 
common 

National  Tube  Company,  common 

American  Bridge  Company,  com- 
mon       

Total,  subsidiary  companies  . 

Add  for  U.  S.  Steel  Corporation, 
after  deducting  $28,000,000  of 
each  class  to  cover  cash  provi- 
sions      

Grand  total  securities  of  U.  S. 
Steel  Corporation  repre- 
senting commissions  to 
promoters  and  bankers  for 
the  Corporation  and  its 
constituent  concerns  com- 
bined      


',192 

3>599,6i9 

1 1 ,600,000 

10,000,000 
5,000,000 

5,000,000 
20,000,000 

7,250,000 


Rates  of  Ex- 
change into  U.  S. 
Steel  Stock 


Preferred  Common 


63,306,811 


110.00 
4.00 


8.80 


107.50 

102.50 

125.00 
125.00 

100.00 
125.00 

105.00 


Total  Amount  of  U.S. 

Steel  Stocks  Issued 

IN  THIS  Exchange 


Preferred 


5942,911 
143.985 


2,000,000 


1,760,008 


4,346,904 


36,998,700 


Common 


^3.869,590 
1 1 ,890,000 

12,500,000 
6,250,000 

5,000,000 
25,000,000 

7,612,500 


72,122,090 


36,998,800 


41,845,604 


109,120,890 


It  should  be  repeated  that  this  enormous  total  of  over  $150,- 
000,000  does  not  include  common  stock  issued  as  a  bonus  with 
preferred  for  property  or  for  cash,  but  simply  what  may  be 
termed  the  promotion  and  organization  commissions  in  the  strict 
sense.  In  other  words,  nearly  one  seventh  of  the  total  capital 
stock  of  the  Steel  Corporation  appears  to  have  been  issued, 
either  directly  or  indirectly,  to  promoters  for  their  services. 


214  TRUSTS,    POOLS   AND    CORPORATIONS 

ADDITIONS   TO   PROPERTY   SINCE    1901 

Since  1901  the  Steel  Corporation  has  greatly  increased  its 
investment.  The  increase  has  come  about  in  two  ways  —  first, 
and  most  important,  through  new  construction  and  additions  by 
the  investment  of  surplus  earnings  and  new  capital  derived  from 
the  sale  of  securities ;  and,  second,  through  the  acquisition  of 
competing  concerns  through  issue  of  securities  directly  therefor. 
******** 

By  combining  the  net  additions  to  fixed  property  made  through 
direct  expenditure  and  through  such  acquisitions,  with  the  in- 
crease in  the  current  assets,  and  adding  these  amounts  to  the 
original  value  in  1901,  as  computed  by  the  Bureau  (which  has 
been  considered  as  the  Corporation's  investment  at  that  time), 
the  total  investment  of  the  Corporation  at  the  close  of  19 10  may 
be  determined.  Such  total  investment,  it  is  true,  may  not  repre- 
sent the  actual  value  of  the  tangible  property  of  the  Steel 
Corporation  on  that  date,  particularly  on  account  of  appreciation 
in  the  value  of  natural  resources,  including  real  estate.  The 
rise  in  value  of  property  of  the  Corporation  between  1901  and 
the  close  of  1910,  however,  would  necessarily  have  to  take 
account  of  the  great  concentration  of  control  of  the  industry 
enjoyed  by  the  Steel  Corporation  particularly  with  respect  to 
the  ownership  of  ore.  This  is  a  factor  that  cannot  be  measured 
here. 

Therefore,  the  Corporation's  invcstvient  in  its  properties, 
rather  than  the  valuation  of  these  properties,  is  the  proper  basis 
for  the  current  discussion,  as  well  as  for  computing  profits  taken 
up  later. 

The  table  on  opposite  page  shows  the  additions  to  the  invest- 
ment of  the  Steel  Corporation  from  1901  to  19 10,  together  with 
certain  deductions  for  depreciation  which  were  considered  by  the 
Bureau  as  proper. 

The  figures  of  true  depreciation  given  in  this  table  represent 
the  entire  estimated  depreciation  in  the  properties  of  the  Cor- 
poration, including  exhaustion  and  obsolescence.  The  bulk  of 
such  physical  depreciation  was  made  good  by  expenditures  on 
these    properties    which    were    not   capitalized,    thus  leaving  a 


UNITED   STATES   STEEL   CORPORATION    FINANCE      215 

NET  ADDITIONS  TO   INVESTMENT  OF  STEEL   CORPORATION,   APRIL 
1,    1901,   TO   DECEMBER   31,  1910  --^ 


Net  Out- 

Amount 

standing 

Total 

Estimated 

Made  Good 

Deprecia- 

Net Addi- 

Description 

True 

BY  Expendi- 

tion to  be 

tions  TO 

Additions 

Depreciation 

tures  Not 
Capitalized 

Deducted 

FROM 

Investment 

Investment 

Fixed  property  (ex- 

clusive of  Gary 

and  Tennessee 

Coal,  Iron  and 

Railroad  Com- 

pany) : 

Manufacturing  . 

$151,480,449 

$107,060,053^88,918,509 

$18,141,544 

^133,338,905 

Iron  Ore   .     .     . 

62,093,931 

30,293,497       2,345,016 

27,948,481 

34.145,450 

Coal  and  coke    . 

34,112,303 

21,220,986 

5,534>665 

15,686,321 

18,425,982 

Transportation   . 

74,541,029 

37.336,955 

13,462,331 

23,874,624 

50,666,405 

Miscellaneous 

fixed  property 

5-548,556 

4,242,626 

i,435'982 

2,807,544 

2,741,012 

Other  assets: 

Deferred  charges 

13,243,678 

— 

— 

— 

13,243,678 

Investments  .     . 

2,128,364 

— 

— 

— 

2,128,364 

Sinking  funds     . 

16,067,665 

— 

— 

— 

16,067,666 

Current  assets    . 

101,683,544 

— 

— 

— 

101,683,544 

Total .     .     . 

460,899,520 

200,154,117 

111,695,603 

88,458,514 

372,441,006 

Gary  plant    .     .     . 

69,978,695 

— 

— 

— 

60,978,695 

Tennessee       Coal, 

Iron  and  R.R. 

Co 

60,468,518 

2,856,003 

1,832,843 

1,023,160 

59,445,358 

Add    property   ad- 

justments   .     . 

3,063,594 

— 

— 

— 

3,063,594 

Grand   total 

594,410,327 

203,010,120 

113,528,446 

89,481,674 

504,928,653 

balance  which  may  be  termed  a  "  net  accrued  "  or  "  outstand- 
ing "  physical  depreciation  not  made  good,  which  balance  has 
been  set  against  the  additions  in  order  to  arrive  at  the  net 
additions  to  the  investment. 

While,  therefore,  the  total  allowances  for  depreciation  for 
certain  classes  of  property  appear  somewhat  excessive,  the 
Bureau,  after  analysis,  has  for  the  purpose  of  computing  the 
investment  accepted  these  estimates  as  the  actual  depreciation 


2i6  TRUSTS,    POOLS  AND   CORPORATIONS 

of  the  Corporation's  physical  properties.  They  differ  some- 
what from  the  provisional  allowances  as  stated  in  the  annual 
reports.  These  provisional  allowances  in  a  few  cases  were  ad- 
mittedly excessive  or  included  amounts  not  representing  actual 
depreciation.  Such  excessive  provisions  have  been  excluded 
by  the  Bureau  and  also  restored  to  the  earnings.  The  total 
depreciation  allowances  given  in  the  table  include  provisions  for 
blast-furnace  relining,  which  in  the  annual  reports  are  not  in- 
cluded under  the  provisional  depreciation  allowances. 

The  constituent  companies  of  the  Corporation  very  properly 
compute  their  depreciation  charges  (including  exhaustion)  on  the 
original  cost  of,  or  investment  in,  the  various  properties  and  not 
on  the  replacement  cost  (either  actually  incurred  or  anticipated). 

In  addition  to  the  provisions  for  depreciation  above  described, 
the  Steel  Corporation  writes  off  its  property  account  each  year 
other  varying  sums,  usually  of  large  amount.  These  further 
sums,  however,  as  explained  by  the  Corporation  to  the  Bureau, 
do  not  represent  true  depreciation  based  on  original  cost  or 
purchase  value  of  the  physical  property  to  subsidiary  concerns, 
but  are  instead  an  offset  of  a  part  of  the  inflated  valuations  at 
which  the  stocks  of  the  subsidiary  companies  are  carried  on  the 
books  of  the  Steel  Corporation.  Such  additional  amounts 
written  off  by  the  Steel  Corporation  itself,  on  account  of  over- 
capitalization, while  probably  entirely  justified  from  that  stand- 
point, have,  however,  no  relation  to  the  real  depreciation  of  such 
first  cost  of  the  physical  properties,  and  consequently  have  not 
been  deducted  from  earnings  by  the  Bureau. 

Investment  of  Steel  Corporation  at  the  Close  of  1910 

The  Steel  Corporation  has  made  no  detailed  appraisal  of  its 
properties  since  the  close  of  1907.  The  Bureau's  computation 
of  the  investment  in  the  Corporation's  property  down  to  the 
close  of  1910  is  given  in  the  table  on  opposite  page. 

The  Bureau  has  therefore  computed  the  actual  investment  of 
the  Steel  Corporation  in  its  various  properties  at  the  close  of 
1910  at  ^1,186,982,038.  This  compares  with  a  total  valuation 
in  April,   1901,  of  $682,053,385.      In    other  words,  during  the 


UNITED   STATES   STEEL   CORPORATION    FINANCE      217 


INVESTMENT  IN  TANGIBLE   PROPERTY  OF   STEEL  CORPORATION  ON 
DECEMBER  31,  1910,  AS  COMPUTED  BY  BUREAU 


Description 


Investment 
1901 


Net 
Additions 
1901-1910 


Total  Invest- 
ment Dec.  31, 
igio 


Fixed  property  (exclusive  of  Gary  and  Ten- 
nessee Coal,  Iron  and  Railroad  Company) : 

Manufacturing 

Iron  Ore 

Coal  and  coke 

Transportation 

Miscellaneous  fixed  property  .... 
Other  assets : 

Deferred  charges 

Investments 

Sinking  funds 

Current  Assets 

Total 

Gary  Plant 

Tennessee  Coal,  Iron  and  Railroad  Company 
Adjustments .     .     .     . 

Grand  total 


5250,000,000 

100,000,000 

80,000,000 

91,500,000 

24,000,000 

2,088,027 
241,030 

239 
134,224,089 


^133.338,905 

34,145,450 

18,425,982 

50,666,405 

2,741,012 

13,243,678 

2,128,364 

16,067,666 

101,683,544 


^383.338,905 

134,145450 
98,425,982 

142,166,405 
26,741,012 

15.331,705 

2,369,394 

16,067,905 

235.907,633 


682,053,385 


372,441,006 

69,978,695 

59.445.358 

3,063.594 


1,054,494,391 

69,978,695 

59.445.358 

3,063,594 


682,053,385 


504,928,653 


1,186,982,038 


period  from  April,  1901,  to  December  31,  1910,  the  Corporation 
has  made  an  additional  net  investment  in  its  properties  of  no  less 
than  $504,928,653.  Of  this  amount,  roughly,  $  435,000,000  was 
virtually  provided  from  earnings.  These  amounts,  it  should  be 
noted,  are  over  and  above  the  allowance  for  ordinary  maintenance 
and  repairs  and  for  actual  net  depreciation  as  given  above. 

This  great  addition  to  the  investment  of  the  Steel  Corporation 
has  eliminated  a  considerable  amount  of  the  "water"  in  the 
original  capitalization  of  the  company.  The  increase  in  the  in- 
vestment does  not,  however,  exactly  measure  the  amount  of 
water  or  inflated  capitalization  thus  offset,  partly  because  the 
capitalization  of  the  Corporation  has  not  been  the  same.  In  the 
first  place,  the  capitalization  has  been  considerably  increased, 
particularly  through  the  issue  of  new  bonds  and  other  forms  of 
indebtedness  and  also  through  the  assumption  of  liabilities  of 
several  concerns  which  have  been  acquired.     On  the  other  hand, 


2i8  TRUSTS,    POOLS   AND  CORPORATIONS 

a  part  of  this  increase  has  been  offset  by  the  liquidation  of  a 
part  of  the  bonded  indebtedness.  Although  the  preferred  stock 
of  the  Corporation  was  reduced  in  1903  by  ^150,000,000,  this 
was  accompHshed  only  by  a  corresponding  increase  in  the 
bonded  debt,  by  the  so-called  bond  conversion  plan,  a  severely 
criticized  operation  and  one  involving  certain  objectionable 
features,  fully  discussed  in  the  body  of  the  report.  The  total 
net  outstanding  capitalization  of  the  Steel  Corporation  on  De- 
cember 31,  19 10  (including  with  the  capitalization  the  purchase- 
money  obligations  and  real-estate  mortgages,  as  in  previous 
instances,  but  excluding  $620,352  par  value  of  stocks  of  sub- 
sidiary companies  not  held  by  United  States  Steel  Corporation), 
was  $1,468,033,260.  The  excess  of  the  capitalization  over  the 
indicated  investment  ($1,186,982,038)  was,  therefore,  $281,051,- 
222,  whereas  at  its  organization  in  1901  the  disparity  between 
the  two  figures  was  $720,846,817.  It  is  apparent,  therefore, 
that  a  large  part  of  the  water  in  the  capitalization,  as  it  may  be 
called,  has  been  ehminated. 

The  Steel  Corporation  undoubtedly  would  contend  that  there 
was  not  a  disparity  of  $281,000,000  between  its  capitalization 
and  the  actual  value  of  its  property  at  the  close  of  1910.  In- 
deed, the  Steel  Corporation  in  its  balance  sheet  of  December  31, 
1910,  claimed  total  assets  (after  deduction  of  current  liabilities) 
of  approximately  $1,693,000,000,  or,  roughly,  $225,000,000  over 
and  above  the  outstanding  capitalization  as  above  stated.  Of  this 
excess  $164,000,000  was  surplus  and  the  balance  sundry  reserves. 
This  balance  sheet  valuation,  it  will  be  seen,  is  about  $500,000,000 
in  excess  of  the  investment  as  computed  by  the  Bureau. 

The  Steel  Corporation  in  defending  its  19 10  book  valuation 
undoubtedly  would  rely  in  the  main  upon  two  considerations  — 
first,  that  there  has  been  an  appreciation  in  its  natural  resources, 
particularly  ore,  and  second,  that  there  is  a  so-called  "  merger 
value  "  attaching  to  its  properties  because  of  their  combination 
and  coordination  under  a  single  control. 

So  far  as  the  ore  is  concerned,  there  has  been  no  such  marked 
appreciation  as  the  Steel  Corporation  claims.  Moreover,  a  con- 
siderable part  of  whatever  actual  appreciation  has  occurred  in 
ore  values  undoubtedly  is  due  to  the  rapid  concentration  of  ore 


UNITED   STATES   STEEL   CORPORATION    FINANCE     219 

property  in  the  hands  of  a  comparatively   few   interests,   and 
especially  in  the  hands  of  the  Steel  Corporation  itseltr 

With  respect  to  "merger  value,"  it  is  probably  true  that  the 
various  properties  acquired  by  the  Steel  Corporation,  taken 
together  with  the  organization  of  this  company  as  a  going  con- 
cern, do  have  a  value  in  excess  of  the  sum  of  their  values  as 
separate  entities.  The  coordination  and  integration  made  pos- 
sible by  the  combination  of  such  properties  under  a  single  con- 
trol undoubtedly  tend  to  reduce  costs  either  through  economies 
or  through  removing  the  necessity  of  paying  profits  to  others. 
Further,  in  so  far  as  the  concentration  of  the  industry  under  the 
control  of  a  single  concern  gives  to  it  a  monopolistic  power  over 
production  and  prices,  this  may  result  in  an  increase  in  its 
earning  power  and  consequently  in  an  increase  in  its  value  as  a 
going  concern.  This  involves,  however,  the  reduction  of  actual 
or  potential  competition.  Indeed,  much  of  what  is  ordinarily 
termed  merger  value,  in  so  far  as  it  exists,  is  to  a  greater  or  less 
degree  a  monopolistic  value.  To  allow  a  single  company,  which 
has  secured  the  bulk  of  a  given  industry,  credit  for  such  merger 
value,  as  a  basis  on  which  to  earn  profits,  raises,  therefore,  a 
question  of  far-reaching  public  policy.  In  the  absence  or  in- 
effectiveness of  competition,  either  actual  or  potential,  earnings 
might  be  obtained  which,  if  capitalized  at  an  ordinary  rate  of 
profit,  would  give  a  value  or  capitalization  greatly  in  excess  of 
the  real  investment.  To  regard  a  valuation  so  arrived  at  as 
justifying  such  profits  under  these  conditions  would  be  reasoning 
in  a  circle,  because  the  real  question  is  whether  the  profits 
themselves,  used  to  determine  the  capitalization,  were  reasonable. 
For  the  reasonableness  of  profits,  only  two  criteria  are  practi- 
cally available,  namely,  first,  the  existence  of  free  and  fair 
competition,  and,  second,  the  rate  of  profit  on  the  actual  invest- 
ment. Of  these  two  criteria  the  second  is  the  only  practicable 
one  available,  where  competition  is  not  effective.  Therefore 
both  because  of  the  vital  issue  involved,  as  well  as  because  of 
the  practical  consideration  of  establishing  an  investment  which 
shall  permit  of  intelligent  discussion  of  profits,  the  Bureau, 
while  admitting  there  is  an  element  of  merger  value  in  a  going 
concern,  either  from  great  concentration  of  control,  monopolistic 


220  TRUSTS,    POOLS   AND    CORPORATIONS 

power,  or  other  influences,  has  made  no  addition  therefor  to  the 
investment  of  the  Steel  Corporation. 


Profits  of  the  Steel  Corporation 

The  profits  earned  upon  the  investment  of  the  Steel  Corpora- 
tion, as  computed  by  the  Bureau,  have  averaged  12  per  cent  for 
the  entire  period  from  1901  to  1910.  The  extreme  range  was 
from  J. 6  per  cent  in  1904  to  15.9  per  cent  in  1902. 

As  already  stated,  the  average  for  the  period  from  April  i, 
1901,  to  December  31,  1910,  is  12  per  cent.  The  average  rate 
for  the  first  four  and  three  fourths  years  was  12.5  per  cent,  as 
against  1 1.6  per  cent  in  the  five  years  from  1906  to  1910.  There- 
fore, in  so  far  as  any  tendency  may  be  noted,  it  is  toward  a  lower 
rate  of  profit  in  recent  years. 

The  table  shows  that  in  the  years  1904  and  1908,  which  were 
years  of  rather  marked  depression  in  the  iron  and  steel  business, 
the  rate  of  profit  of  the  Steel  Corporation  fell  to  ^.6  per  cent  on 
the  investment  in  1904  and  7.8  per  cent  in  1908,  as  compared 
with  a  maximum  profit  of  over  15  per  cent  in  1902  and  1906. 
Prior  to  the  formation  of  the  Steel  Corporation  and  other  large 
consohdations,  the  iron  and  steel  industry  was  noted  for  violent 
changes  in  the  rate  of  profit,  the  industry,  indeed,  having  been 
aptly  termed  either  "prince  or  pauper."  This  table  shows  that 
so  far  as  the  Steel  Corporation  is  concerned  the  business, 
although  still  subject  to  marked  fluctuations  in  profits,  has,  even 
in  the  most  depressed  years  of  this  period,  shown  a  substantial 
return  on  the  actual  investment. 

It  should  be  pointed  out  that  an  average  rate  of  12  per  cent 
for  a  concern  of  the  size  of  the  Steel  Corporation,  which  em- 
braces more  than  one  half  of  the  entire  iron  and  steel  industry 
of  the  country,  has  a  very  different  significance  than  the  same 
rate  in  the  case  of  a  relatively  small  concern.  While  exception- 
ally efficient  or  fortunate  concerns  in  the  steel  business  may  earn 
rates  in  excess  of  this  average,  on  the  other  hand  a  great  many 
of  the  less  efficient  companies  undoubtedly  earn  very  much 
smaller  rates,  while  in  some  instances  the  business  is  conducted 
at  a  loss.     Therefore,  an  average  rate  of  12  per  cent  for  over 


UNITED    STATES   STEEL   CORPORATION    FINANCE     221 

one  half  of  the  entire  steel  business  of  the  country  is  so  much 
more  significant  than  the  same  rate  or  even  a  larger  rate  for  a 
comparatively  small  concern.  It  probably  means  that  the  return 
on  a  considerable  proportion  of  the  business  of  the  country, 
v^hich  under  more  competitive  conditions  and  more  scattered 
ownership  would  be  conducted  at  a  lower  rate  of  profit,  has  been 
considerably  increased. 

It  may  also  be  noted  that  the  investment  includes  a  large 
amount  of  idle  property,  particularly  unimproved  ore  reserves, 
which,  of  course,  tends  to  reduce  the  rate.  However,  the  invest- 
ment in  undeveloped  iron-ore  property  as  computed  by  the  Bu- 
reau is  not  so  great  as  to  very  materially  affect  the  rate  of  profit. 
Nevertheless  it  is  worth  emphasizing  that  the  rate  of  profit  here 
given  includes  not  only  the  iron  and  steel  industry  proper,  but 
also  the  iron-ore  mining  industry.  Prior  to  the  era  of  consolida- 
tion the  latter,  to  a  large  extent,  was  distinct  from  the  manufac- 
ture of  iron  and  steel,  and  under  the  scattered  ownership  of 
iron-mining  properties  then  prevailing  profits  generally  are 
understood  to  have  been  comparatively  low,  on  the  average. 
Under  present  conditions  in  the  iron  and  steel  industry,  how- 
ever, the  Lake  iron-ore  industry  is  one  of  the  most  profitable 
branches  of  the  business.  This  factor  should  be  considered, 
therefore,  in  comparing  the  profits  of  the  iron  industry  at  the 
present  time  with  those  obtained  under  the  different  conditions 
formerly  prevailing. 

The  rate  of  earnings  on  the  investment  of  the  Steel  Corpora- 
tion as  computed  by  the  Bureau  is,  of  course,  considerably  larger 
than  the  rate  of  net  profit  upon  the  capitalization,  as  indicated 
by  the  annual  reports  of  the  Corporation,  because  the  invest- 
ment as  established  by  the  Bureau  is  very  much  less  than  the 
capitalization.  The  rate  of  12  per  cent  here  given,  it  should  be 
clearly  understood,  covers  the  entire  investment  in  the  property, 
whether  represented  by  capital  stock  or  bonded  debt.  This  rate 
of  earnings  on  the  total  true  investment  understates  the  rate 
which  accrues  to  the  benefit  of  the  Steel  Corporation  (or  the 
stockholders  as  distinguished  from  the  stockholders  and  bond- 
holders combined)  on  that  part  of  the  true  investment  which 
may  be  considered  as  represented  by  the  capital  stock.     That  is 


222  TRUSTS,    POOLS   AND   CORPORATIONS 

to  say,  if  that  part  of  the  true  investment  for  which  bonds  were 
issued  were  deducted  from  the  total  true  investment,  and  a  cor- 
responding amount  of  bond  interest  at  the  rates  paid  by  the 
Corporation  were  deducted  from  the  earnings,  then  a  compari- 
son of  the  remainder  of  the  investment  with  the  remainder  of 
the  earnings  would  indicate  a  considerably  higher  average  profit 
than  12  per  cent.  Such  a  computation,  however,  cannot  be 
made  in  a  definite  or  satisfactory  manner,  particularly  because 
the  original  bonds  issues  of  the  Corporation  did  not  correspond 
with  the  true  value  of  the  property  for  which  they  were  issued. 
Therefore,  to  deduct  them  from  the  true  investment  would  leave 
an  unduly  low  remainder  for  the  capital  stock  and  unfairly  exag- 
gerate the  rate  of  profit  on  that  part  of  the  true  investment  which 
may  be  considered  as  being  contributed  by  the  stockholders. 

Hence  the  Bureau  does  not  attempt  to  give  in  definite  figures 
the  rate  of  profit  earned  by  the  Steel  Corporation  on  the  true 
investment  represented  by  its  capital  stock,  but  merely  calls 
attention  to  the  fact  that  the  rate  of  profit  above  shown  is  not 
the  rate  earned  on  that  part  of  the  true  investment  which  may 
be  considered  as  contributed  by  the  stockholders,  but  a  lower 
rate  earned  on  the  total  true  investment  and  accruing  to  the 
stockholders  and  bondholders  combined. 

Position  of  Steel  Corporation  in  the  Industry 

The  Steel  Corporation,  despite  its  great  size,  is  not  exempt 
from  competition.  Indeed,  the  evidence  on  the  whole  indicates 
that  competition  in  the  industry  has  steadily  been  increasing. 
Notwithstanding  the  great  additions  made  by  the  Corporation 
to  its  properties  from  earnings  and  the  acquisition  of  several 
important  competing  concerns,  its  proportion  of  the  business  in 
nearly  every  important  product  except  pig  iron  and  steel  rails  is 
less  than  it  was  in  1901.  This  is  shown  by  the  table  on  oppo- 
site page  of  percentages  compiled  by  the  Corporation  from  its 
own  figures  in  connection  with  data  gathered  by  the  American 
Iron  and  Steel  Association. 

The  Steel  Corporation  did  not  compute  its  percentage  of  the 
ore  production  of  the  country.     Its  proportion  of  the  production 


UNITED    STATES   STEEL   CORPORATION    FINANCE     223 


Proi'Ortions  of  Output  of   Principal  Iron  and   Steel   Producxs,  Produced 

BY  United  States  Steel  Corporation  and  by  Independent 

Companies,  respectively,  in  1901  and  1910 


Products 


Pig  iron,  Spiegel,  and  ferro 

Steel  ingots  and  castings 

Rails 

Structural  shapes 

Plates  and  sheets  of  all  kinds  ^     .      .      .      . 
Black  plate  produced  in  tin  mills 

Coated  tin-mill  products 

Black  and  coated  sheets  produced  in  sheet 

mills 

Wire  rods 

Wire  nails 

Wrought  pipes  and  tubes  ^ 

Seamless  tubes  -  .      .     . 


Steel  Corporation's 

Independent  Com- 

Percentages 

panies. 

AGES 

Percent- 

1 901 

1910 

1901 

I9I0 

43-2 

43-4 

56.8 

56. 

657 

54-3 

34-3 

45- 

59-8 

58.9 

40.2 

41. 

62.2 

347.0 

37-8 

'^53-< 

64.6 

349.7 

35-4 

3  50. 

79.8 

52.9 

20.2 

47- 

731 

61. 1 

26.9 

38. 

67-3 

38.9 

32-7 

61. 

67.7 

67-3 

22.3 

32- 

68.1 

55-5 

319 

44. 

57-2 

38-2 

42.8 

61. 

82.8 

55-3 

17.2 

44. 

of  Lake  Superior  ore,  such  ore  being  practically  the  basis  of  the 
steel  industry  (arrived  at  by  comparing  the  known  production  of 
the  Steel  Corporation  with  the  total  production  as  estimated  by 
the  Geological  Survey),  fell  from  60.6  per  cent  in  1901  to  51.6 
per  cent  in  1909  (figures  for  1910  not  being  available). 

This  table  shows  that  whereas  the  Steel  Corporation  in  1910 
had  fully  maintained  the  share  of  the  country's  total  produc- 
tion of  pig  iron  which  it  held  in  1901,  its  proportions  of  the  pro- 
duction of  nearly  all  steel  products  had  declined,  and  in  most 
cases  sharply  decHned.  The  only  important  exception  was 
steel  rails.  The  maintenance  of  its  proportion  here  is  chiefly  due 
to  the  erection  of  a  very  large  rail  mill  at  the  new  Gary  plant 
and  to  the  acquisition  of  the  Tennessee  Coal,  Iron  and  Railroad 
Company,  which  had  a  considerable  steel  rail  production. 

1  Includes  sheets  for  tinning,  galvani:^ing,  and  other  coatings. 
-  These  percentages  are  based  on  capacity  and  not  production.     The  capacity  of 
independent  companies  is,  moreover,  partly  estimated. 
3  For  1909;   figures  for  1 910  not  available. 


224  TRUSTS,    POOLS  AND   CORPORATIONS 

Taking  the  production  of  steel  ingots  and  castings  as  a  basis 
it  will  be  seen  that  the  Steel  Corporation's  percentage  of  the 
total  fell  from  65.7  per  cent  in  1901  to  54.3  per  cent  in  1910. 
This  figure,  perhaps,  is  the  best  single  criterion  by  which  to 
judge  the  change  in  the  Corporation's  position  in  the  steel  in- 
dustry from  a  producing  standpoint.  It  will  be  seen  that  the 
Corporation's  proportions  of  production  of  black  plate,  coated 
tin-mill  products,  and  black  and  coated  sheets,  fell  off  to  a  very 
marked  extent,  which  indicates  that  competition  has  been  partic- 
ularly active  in  these  branches.  Its  share  of  the  production  of 
wrought  pipe  and  tubes  and  of  seamless  tubes  likewise  fell  off 
very  heavily.  In  wire  products  the  Corporation  has  maintained 
its  relative  position  rather  better,  but  even  in  these  there  has 
been  a  marked  recession  in  the  percentages  of  the  business  done. 

It  should  be  noted  that  the  decline  in  the  production  shown 
by  this  comparison  of  the  1901  and  1910  percentages  was  prac- 
tically continuous  for  most  products  throughout  the  entire 
period.  However,  the  actual  output  of  the  Corporation  has 
shown  a  very  great  increase.  For  example,  the  Steel  Corpora- 
tion's production  of  crude  steel  ingots,  which  is  typical  of  its 
total  business,  increased  from  9,743,918  tons  in  1902  (the  first 
full  year  of  operations)  to  14,179,369  tons  in  1910,  an  increase 
of  45.5  per  cent. 

While,  however,  these  statistics  clearly  show  the  existence  of 
active  competition  in  production,  it  should  be  clearly  pointed 
out  that  such  competition  has  not  been  so  evident  with  respect 
to  prices,  where  it  has  been  materially  modified  by  the  existence 
of  a  price  policy  described  as  "  cooperation."  This  will  be  dis- 
cussed in  a  later  part  of  the  report. 

While  the  Corporation's  proportion  of  the  production  of  both 
raw  materials  and  finished  products  thus  shows  a  marked  de- 
crease, the  proportions  given  do  not  fairly  represent  the  true 
position  of  the  Corporation  in  the  industry  as  a  whole.  In  iron 
ore,  in  particular,  the  Steel  Corporation  undoubtedly  occupies 
a  dominating  position.  The  Corporation's  holdings  of  what  are 
now  regarded  as  commercially  available  ores  exceed  those  of  all 
other  iron  and  steel  interests  combined.  It  should  be  clearly 
understood  that  the  ores  of  the  Lake  Superior  region  substan- 


UNITED   STATES    STEEL   CORPORATION    FINANCE     225 

tially  form  the  basis  of  the  steel  production  of  the-«eruntry  at 
the  present  time.  While  the  Steel  Corporation  has  very  exten- 
sive holdings  of  ore  elsewhere,  the  great  bulk  of  its  ore  holdings 
are  in  the  Lake  Superior  district.  In  1907  the  holdings  of  the 
Steel  Corporation  in  Minnesota,  which  state  includes  the  Mesabi 
and  Vermilion  ranges,  according  to  a  carefully  prepared  schedule 
of  the  Minnesota  Tax  Commission,  amounted  to  about  91 3,000,000 
tons,  or  "j^  per  cent  of  the  total  ore  deposits  for  the  state. 

The  Corporation's  proportion  for  the  whole  Lake  Superior 
region,  including  the  old  ranges  in  Michigan,  is  apparently 
about  the  same.  Authoritative  data  submitted  to  the  Senate 
Finance  Committee  in  1909  by  a  prominent  iron  manufacturer 
with  the  Steel  Corporation's  consent  showed  that  the  Corpora- 
tion itself  then  reckoned  on  about  1,625,000,000  tons  of  Lake 
ore,  of  which  1,258,000,000  tons  was  of  the  current  commercial 
standard.  An  estimate  of  a  prominent  mining  engineer,  sub- 
mitted to  the  Finance  Committee  at  the  same  time,  placed  the 
total  reserves  of  Lake  ore  of  the  commercial  standard  at  about 
1,600,000,000  tons.  On  this  basis,  therefore,  the  Steel  Corpora- 
tion would  have  had  over  75  per  cent  of  the  total  commercially 
available  ore  in  the  entire  Lake  Superior  region.  Of  course, 
the  ideas  of  the  consulting  engineer  and  those  of  the  Steel 
Corporation's  experts  as  to  what  were  commercially  available 
ores  may  have  differed  somewhat,  but  it  is  not  likely  that  the 
proportion  of  ore  controlled  by  the  Steel  Corporation  as  shown 
by  these  two  estimates  is  too  high,  because  both  of  these  state- 
ments were  submitted  by  the  manufacturer  in  question  together 
with  extensive  data  for  other  ore  supplies  in  the  United  States 
for  t"  e  avowed  purpose  of  proving  that  the  proportion  of  the 
ore  '  nly  controlled  by  the  Steel  Corporation  was  less  than  85 
pe  .  .  of  the  total  supply.  In  1908  the  commercially  avail- 
a'  oie  of  the  Lake  Superior  region,  as  computed  by  the 
United  States  Geological  Survey,  for  the  Conservation  Com- 
mission, was  3,500,000,000  tons,  but  the  iron  content  assumed 
as  a  basis  for  available  ore  was  considerably  lower  than  in  the 
two  preceding  estimates,  thus  greatly  increasing  the  total  quan- 
tity. This  and  other  evidence  indicates  that  the  Survey  esti- 
mate is  not  fairly  comparable  with  that  of  the  Corporation. 


226  TRUSTS,   POOLS  AND   CORPORATIONS 

In  this  connection  it  may  be  stated  that  the  chairman  of  the 
Steel  Corporation,  in  his  testimony  before  the  Ways  and  Means 
Committee  in  1908,  admitted  that  the  Corporation  had  control 
of  the  ultimate  ore  supply  of  the  whole  country.  Later,  how- 
ever, in  191 1,  in  testimony  before  a  special  committee  of  the 
House  of  Representatives,  he  materially  modified  that  statement. 

In  discussing  the  Corporation's  position  in  the  ore  industry 
account  must  be  taken  of  the  fact  that  new  discoveries  of  ore 
are  constantly  being  made,  and  also  that  when  somewhat  lower 
grades  of  ore  become  commercially  available  the  total  reserve 
will  be  greatly  increased.  The  use  of  ore  of  much  lower  grade 
involves,  however,  much  higher  costs  of  production,  so  that  any 
concern  which  has  substantial  control  of  the  best  grades  of  ore 
would  under  such  circumstances  be  in  a  position  to  obtain  an 
enormous  increase  in  profits.  Taking  conditions  as  they  are 
to-day,  there  can  be  no  doubt  that  the  Steel  Corporation  has 
control  of  the  great  bulk  of  the  commercially  available  ores  of 
the  Lake  Superior  district,  its  proportion  probably  being  about 
three  fourths  of  the  total.  In  addition,  of  course,  it  has  there  a 
large  amount  of  low-grade  ore,  as  well  as  immense  deposits  in 
the  South.  The  Corporation's  total  ore  holdings  may  be  con- 
servatively placed  at  more  than  2,500,000,000  tons. 

The  system  of  leasing  ore  mines,  as  employed  in  the  Lake 
region,  is  important  in  this  connection.  A  very  large  part  (ap- 
proximately two  thirds  in  1910)  of  the  Corporation's  total  hold- 
ings in  the  Lake  region  is  held  by  lease.  Frequently  there  is 
no  initial  investment  in  such  leaseholds,  and  even  where  a  bonus 
is  paid  it  is  usually  small,  while  the  minimum  tonnage  on  which 
royalty  must  be  paid,  whether  mining  operations  are  conducted 
or  not,  is  generally  unimportant.  The  Hill  lease  is,  of  course, 
as  above  shown,  a  very  marked  exception  in  the  last  respect. 

It  will  be  seen,  therefore,  that  this  ore-leasing  system,  where 
there  is  no  limit  placed  on  the  number  of  leases  that  can  be  com- 
bined under  a  single  interest,  greatly  facilitates  the  gathering  in 
by  a  great  concern  like  the  Steel  Corporation  of  a  vast  amount 
of  ore  reserves,  far  in  advance  of  any  commercial  need  for  them. 
This  not  only  prevents  others  from  getting  such  property  but 
also  secures  to  such  a  concern  the  benefit  of  any  appreciation 


UNITED    STATES   STEEL   CORPORATION    FINANCE     227 

in  value  which  may  come  about  cither  from  natural  causes  or  as 
a  result  of  this  very  concentration  of  ownership,  (jbviously,  a 
system  which  thus  lends  itself  to  such  marked  concentration  of 
ore  property  for  many  years  in  advance  (a  common  term  of  lease 
being  fifty  years),  at  a  comparatively  small  cost,  involves  ques- 
tions of  the  highest  public  importance.  It  might  be  said  that 
the  lease  system  as  thus  applied  in  the  Lake  ore  region  really 
affords  an  opportunity  for  a  wealthy  interest  to  attempt  a  corner 
tin  ore  reserves  on  what  is,  in  effect,  a  margin  basis.  Of  course 
in  such  extensive  acquisitions  there  is  a  decided  speculative  risk, 
just  as  in  similar  efforts  to  control  commodity  markets,  particu- 
larly, the  possibiUty  of  the  discovery  of  available  deposits  else- 
where, or  new  methods  of  mining  which  may  render  what  are 
now  nonavailable  ores  available  for  present  commercial  purposes. 

The  dominating  position  in  the  ore  industry  enjoyed  by  the 
Steel  Corporation  through  this  great  ownership  of  ore  reserves 
is  heightened  because  of  its  very  marked  degree  of  control  of  the 
transportation  of  ore  in  the  Lake  Superior  district.  The  Cor- 
poration owns  two  of  the  most  important  ore  railroads,  the 
Duluth  and  Iron  Range  Railroad  and  the  Duluth,  Missabe  and 
Northern  Railway.  The  ore  rates  on  these  railroads  are  about 
I  cent  per  ton  mile.  Their  operating  expenses  are  very  low, 
that  of  the  Duluth,  Missabe  and  Northern  in  1910  being  below 
30  per  cent  of  gross  earnings  as  against  an  average  of  66  per 
cent  for  all  the  railroads  of  the  country.  The  net  earnings  of 
these  ore  railroads,  which  are  chiefly  from  the  ore  traffic,  are 
phenomenal.  This  has  the  practical  effect  of  reducing  the  Steel 
Corporation's  net  cost  of  ore  to  itself  at  upper  Lake  ports  and, 
on  the  other  hand,  of  increasing  that  cost  to  such  of  its  com- 
petitors as  are  dependent  upon  the  Corporation's  railroads  for 
transportation. 

Hence,  not  only  on  account  of  its  great  holdings  of  ore  but 
also  on  account  of  these  peculiar  advantages  enjoyed  in  the 
transportation  of  the  ore  the  Steel  Corporation  occupies  an  ex- 
tremely commanding  position  in  the  iron  and  steel  industry. 
Indeed,  in  so  far  as  the  Steel  Corporation's  position  in  the  entire 
iron  and  steel  industry  is  of  monopolistic  character  it  is  chiefly 
through  its  control  of  ore  holdings  and  the  transportation  of  ore. 


VII 

THE   UNITED    STATES    STEEL    CORPORATION'S 
BOND    CONVERSION! 

ON  April  17,  1902,  the  president  of  the  United  States  Steel 
Corporation  issued  a  circular  to  the  stockholders,  which 
invited  their  cooperation  in  a  plan  to  raise  $50,000,000  of  new- 
capital.  Half  of  this  amount  was  to  repay  loans  incurred  by  the 
constituent  companies  for  construction  work  which  was  in  part 
rendered  unnecessary  by  the  merger,  but  which,  owing  to 
advance  commitments,  could  not  be  suspended.  In  addition, 
$25,000,000  was  required  for  improvements,  which,  it  was  stated, 
would  effect  an  annual  saving  of  at  least  $10,000,000.  The 
plan  proposed  to  the  stockholders  for  raising  this  money  was 
"  to  rearrange  your  corporation's  capitalization  (which,  in  round 
numbers,  now  consists  of  $300,000,000  of  bonds,  $500,000,000 
of  preferred  stock,  and  $500,000,000  of  common  stock)  by  sub- 
stituting for  $200,000,000  of  the  preferred  stock,  $200,000,000 
of  sinking  fund  sixty  year  5  per  cent  mortgage  gold  bonds,  and  by 
selling  $50,000,000  of  additional  bonds  of  such  issue  for  cash.  As 
the  preferred  stock  carries  7  per  cent  dividends,  while  the  bonds 
would  bear  but  5  per  cent  interest,  the  $50,000,000  desired  could, 
in  this  way,  be  added  to  the  corporate  resources,  and  the  aggregate 
of  the  annual  charges  for  interest  and  dividends,  instead  of  being 
increased  $3,500,000,  would  be  decreased  $1,500,000  as  com- 
pared with  the  present  sum  total  of  these  two  requirements." 

The  plan  offered  to  each  preferred  stockholder  the  right  to 
subscribe  to  the  new  bonds  to  the  extent  of  one  half  his  hold- 
ings of  preferred  stock,  40  per  cent  of  each  subscription  to  be 

1  From  the  Quarterly  Journal  of  Economics,  Vol.  XVIII,  1903,  pp.  22-53,  with 
certain  minor  editorial  emendations  approved  by  the  author.  The  genesis  of  the 
Steel  Corporation  is  outUned  in  Chapters  V  and  VI,  supra. 

228 


STEEL   CORPORATION    BOND   CONVERSION  229 

payable  in  preferred  stock,  and  10  per  cent  in  cash,  or  the  sub- 
scription could  be  limited  to  40  per  cent,  in  which  event  no  cash 
payment  was  required.  The  circular  also  stated  that  a  syndicate 
had  been  formed,  "including  some  directors,"  to  further  the 
success  of  the  plan  ;  and,  in  the  call  for  a  special  meeting  of 
stockholders  to  be  held  May  19,  one  of  the  purposes  of  the 
meeting  was  stated  to  be  the  ratification  of  an  agreement  be- 
tween the  United  States  Steel  Corporation  and  J.  P.  Morgan 
and  Company,  acting  for  this  syndicate. 

This  agreement  is  dated  April  i,  1902,  and  contains  the  fol- 
lowing provisions  : 

1.  That  the  party  of  the  second  part,  known  as  "  the  bankers," 
on  or  before  the  first  day  of  July,  1902,  should  offer  to  the  pre- 
ferred stockholders  the  right  to  subscribe  to  the  second  mortgage 
bonds  of  the  company,  on  the  terms  mentioned  in  the  circular, 
for  a  period  of  thirty  days  ; 

2.  That  such  part  of  the  $250,000,000  of  bonds  as  should  not 
be  taken  by  the  preferred  stockholders,  should  be  issued  to  the 
bankers  on  their  request  for  the  syndicate,  to  be  paid  for  in 
preferred  stock,  and  in  cash,  on  the  same  terms  as  those  offered 
to  the  preferred  stockholders,  in  such  amounts  and  at  such  times 
as  the  bankers  might  request,  up  to  October  i,  1903  ; 

3.  That  the  bankers  guarantee  to  the  Steel  Corporation  that 
subscriptions  to  the  new  bonds  to  the  amount  of  $100,000,000 
would  be  made,  payable  $20,000,000  in  cash,  and  $80,000,000 
in  preferred  stock  ; 

4.  That,  as  compensation  for  the  risk,  the  guarantee,  and  the 
various  obligations  assumed  by  the  syndicate,  the  Steel  Corpo- 
ration should  pay  to  the  bankers  a  cash  compensation  equal  to 
4  per  cent  upon  the  aggregate  amount  of  the  bonds  which  should 
be  sold  or  delivered,  either  to  the  preferred  stockholders  or  to 
the  syndicate,  until  October  i,  1903. 

The  plan  and  the  syndicate  agreement  were  submitted  to  the 
stockholders,  and  both  were  approved  by  a  vote  of  7,704,288 
shares  to  12,540  shares  out  of  a  total  number  of  10,185,  811 
shares  outstanding. 

Before  the  plan  could  be  put  into  effect,  an  injunction  was 
appHed   for  on  June  8,    1902,   before  the   Chancellor  of   New 


230  TRUSTS,    POOLS   AND   CORPORATIONS 

Jersey,  against  J.  P.  Morgan  &  Co.  by  Miriam  Berger,  a  pre- 
ferred stockholder,  to  forbid  them  to  issue  bonds  for  stock  under 
the  bankers'  contract,  and  alleging  that  the  plan  of  conversion 
was  unlawful  for  the  following  reasons:  (i)  that  the  plan,  if 
carried  out,  would  impair  the  complainant's  vested  rights  as  a 
stockholder  ;  (2)  that  the  plan  of  issuing  bonds  to  retire  stock 
was  void  against  any  dissenting  stockholder ;  (3)  that  the  plan 
was  ruinous  and  disastrous,  and  impaired  the  value  of  complain- 
ant's stock ;  (4)  that  four  members  of  the  bankers'  iirm  were 
directors  of  the  corporation;  and  (5)  that  the  compensation 
which  might  be  received  by  the  bankers  under  their  contract  was 
without  consideration  and  illegal,  and  that  the  scheme  was  de- 
vised to  secure  exorbitant  commissions  by  this  firm.  An  order 
restraining  the  bankers  from  issuing  any  bonds  in  exchange  for 
preferred  stock  was  granted  by  Vice-Chancellor  Emery  on  the 
ground  that  the  complainant's  vested  rights  would  be  impaired 
by  the  exchange  of  bonds  for  preferred  stock  under  the  terms 
proposed.!  The  case  was  appealed,  the  appeal  being  argued  on 
June  25. 

Before  the  appeal  was  decided,  on  July  5,  a  second  bill  was 
filed  by  J.  Aspinwall  Hodge,  Bernard  Smith,  and  William  H. 
Curtis  against  the  corporation,  the  bankers,  and  the  directors.^ 
The  grounds  on  which  relief  was  asked  for  were  as  follows : 

1.  That  the  plan  interfered  with  the  vested  rights  of  the 
complainants ; 

2.  That  it  was  ultra  vires  and  void ; 

3.  That  the  Steel  Corporation,  under  the  act  of  1902,  could 
not  issue  bonds  for  stock,  because  it  had  not  paid  dividends  on 
the  preferred  stock  for  at  least  a  year  preceding  the  date  of  the 

1  The  ground  on  which  the  injunction  was  granted  was  :  "  that  it  (the  conversion 
plan)  is  a  preferential  distribution  of  capital  among  some  of  the  shareholders  to  the 
exclusion  of  others,  and  not  a  plan  for  an  equal  distribution  among  all  the  preferred 
stockholders.  That  the  capital  represented  by  preferred  stock  up  to  a  limit  of 
^200,000,000  is  to  be  reduced  to  the  extent  the  holders  agree  to  take  bonds,  and 
...  the  stock  of  those  who  decline  to  take  bonds  is  thus  made  subject  to  the  prior 
claim  and  lien  of  those  who  take  bonds." 

^  Smith  and  Curtis,  it  being  proven  that  they  were  not  registered  owners  of  stock 
at  the  time  suit  was  brought,  obtained  no  recognition  in  the  litigation.  The  right 
of  Hodge  to  petition  for  an  injunction  was  recognized. 


STEEL   CORPORATION    BOND    CONVERSION  231 

meeting,  and  because  its  assets,  after  deducting  the  amount  of 
its  bonded  debt,  were  not  equal  in  value  to  the  par  value  of  its 
preferred  stock ; 

4.  That  the  scheme  was  disadvantageous,  and  would  seriously 
damage  the  corporation  and  its  stockholders,  and  that  the  com- 
pensation to  the  bankers  was  exorbitant ; 

5.  That  the  action  of  the  directors  in  approving  the  plan  and 
contract  was  void,  because  fifteen  or  more  of  the  board  of 
directors  were  interested  in  the  underwriting  syndicate ; 

6.  That  the  plan  was  never  legally  ratified  by  the  necessary 
two-thirds  vote  of  the  stockholders,  because  the  votes  upon  the 
stock  controlled  by  the  bankers  and  members  of  the  syndicate 
must  be  counted  to  make  up  the  two-thirds  vote  required  by  law. 

The  injunction  asked  for  was  granted  October  29,  1902,  on 
a  portion  of  the  third  item  of  the  bill  of  complaint,  on  the 
ground  that  only  four  continuous  payments  of  dividends  on  the 
preferred  stock  had  been  made,  the  duration  of  the  period  from 
the  time  of  the  first  declaration  of  a  dividend,  July  2,  1901,  to 
the  date  of  the  stockholders'  special  meeting,  May  19,  1902, 
being  forty-four  days  less  than  one  year,  while  five  continuous 
quarterly  payments  should  have  been  made  to  fulfil  the  require- 
ments of  the  law.  An  appeal  was  allowed  to  the  Court  of 
Errors  and  Appeals,  where  the  case  was  re-argued  in  the 
November  term.  Decision  was  rendered  on  February  18,  1903, 
reversing  the  Vice-Chanccllor,  and  deciding  in  favor  of  the  de- 
fendants, on  the  ground  that  all  the  requirements  of  the  law  had 
been  complied  with,  and  that  "  there  is  no  ground  presented  by 
the  case  or  agitated  in  the  briefs  of  counsel  which  will  justify 
the  interposition  of  a  court  of  equity  to  arrest  the  proposed 
action  of  the  defendants."  A  similar  decision  had  been  ren- 
dered by  the  Court  of  Appeals  in  the  Berger  case  on  October  1 1, 
1902.     The  Steel  Corporation  at  once  put  its  plan  into  effect. 

It  is  proposed,  in  the  following  pages,  to  outline  the  principal 
arguments  in  the  Hodge  suit  as  found  in  the  affidavits,  briefs, 
and  arguments  of  counsel.  Space  does  not,  however,  permit  an 
extended  analysis  of  these  arguments ;  and,  for  the  most  part, 
the  merits  of  the  controversy  will  be  determined  by  the  decisions 
of  the  Vice-Chancellor  and  the  Court  of  Appeals  upon  the  dif- 


232  TRUSTS,    POOLS   AND    CORPORATIONS 

ferent  points  presented.  The  complainants  in  the  Hodge  suit 
presented  the  most  varied  and  forcible  criticisms  which  have 
been  made  of  the  bond  conversion  plan.  It  may  also  be  pre- 
sumed that  the  defendants  placed  their  side  of  the  question  in 
the  most  favorable  Hght.  With  the  opinions  of  two  courts  to 
assist  him,  the  reader  will  have  little  difficulty  in  determining  on 
which  side  lay  the  weight  of  the  evidence. 

Omitting  the  claim  that  the  vested  interests  of  the  complaining 
stockholders  would  be  impaired  by  the  proposed  conversion  of 
preferred  stock  into  bonds,  —  this  point  being  decided  in  the 
Berger  suit  in  favor  of  the  corporation, ^ — and  passing  over,  as 
being  of  merely  technical  interest,  the  ground  on  which  the  Vice- 
Chancellor  granted  the  injunction,  we  find  that  the  complainants 
rested  their  case  upon  the  following  principal  arguments : 

1.  That  the  action  of  the  directors  in  sanctioning  the  plan 
was  illegal,  by  reason  of  the  private  interest  of  several  of  their 
number,  while  the  stockholders,  to  whom  the  extent  of  the 
directors'  interest  had  not  been  fully  disclosed,  could  not  vali- 
date their  illegal  action  ; 

2.  That  the  scheme  was  vitiated  by  actual  fraud,  being  plainly 
designed  to  favor  J.  P.  Morgan  &  Co.  and  their  associates,  at 
the  expense  of  the  corporation  ; 

3.  That  the  contract  with  the  syndicate  was  unfair  to  the 
stockholders,  both  in  the  length  of  time  given  to  them  to  sub- 
scribe for  the  bonds  as  compared  with  the  time  allotted  to  the 
syndicate,  and  the  unreasonable  options  granted  to  the  bankers ; 

4.  That  the  Steel  Corporation  did  not  have  assets  of  the  value 
required  by  law. 

In  developing  the  alleged  illegal  private  interest  of  the  direc- 
tors, the  complainants  began  by  claiming  that  fifteen  of  the 
directors  of  the  Steel  Corporation,  including  the  six  members  of 

^  Opinion  of  the  Court  of  Errors  and  Appeals,  Van  Syckel,  J.,  (p.  11)  :  "That  this 
plan  involves  a  reduction  of  capital  stock  is  conceded:  it  is  the  very  purpose  o-f  the 
plan  to  reduce  it  and  to  retire  it  ;  but  to  the  assertion  that  it  is  preferential,  I  am 
unable  to  assent.  The  same  opportunity  is  given  to  all  to  accept  the  offer,  none  are 
excluded,  and  the  complainant  who  has  declined  the  offer  cannot  say  to  the  ninety 
and  nine  who  have  accepted  it  that  they  have  been  preferred.  There  has  been  no 
preference  on  the  part  of  the  corporation;  the  position  occupied  by  the  complainant 
is  of  her  own  option." 


STEEL   CORPORATION    BOND    CONVERSION  233 

the  Finance  committee,  were  members  of  the  underwriting  syn- 
dicate whose  agreement  with  the  syndicate  managers  was  dated 
March  12,  twenty-eight  days  before  the  resolution  of  the  direc- 
tors approving  the  contract  between  the  syndicate  and  the  Steel 
Corporation.  In  other  words,  at  the  meeting  on  April  i,  when 
the  contract  with  the  syndicate  came  up  before  the  directors,  a 
majority  of  the  board  were  "  personally  and  individually  inter- 
ested in  the  profits  and  advantages  to  be  derived  by  Morgan  & 
Co.  and  their  associates."  .  .  . 

These  benefits  were  considerable.  If  the  stockholders  sub- 
scribed to  the  full  amount  of  $250,000,000  of  bonds,  the  syndi- 
cate would  receive  $10,000,000  in  cash  from  the  corporation. 
In  addition  to  this  large  commission,  the  syndicate  had  the 
privilege  of  exchanging  preferred  stock  for  all  bonds  which 
were  not  taken  by  the  stockholders ;  and  this  option,  it  was 
claimed,  presented  the  certainty  of  a  large  additional  profit.  It 
is  the  law  of  New  Jersey  that  where  the  personal  interest  of  a 
director  is  concerned  in  a  contract  with  his  corporation,  that 
contract  is  voidable.  On  this  ground,  the  complaints  asserted 
that  the  action  of  the  directors  was  illegal. 

The  answer  to  this  argument,  reserving  to  a  later  page  a  dis- 
cussion of  the  benefits  of  the  contract,  was  short  and  decisive. 
Such  contracts  as  the  one  in  question,  said  the  defendants,  while 
voidable  at  the  option  of  the  stockholders,  can  be  validated 
either  expressly  by  a  vote  of  the  stockholders,  or  by  the  stock- 
holders not  electing  to  take  any  action  in  the  matter.  In  the 
present  instance,  since  the  stockholders,  by  an  enormous  ma- 
jority, had  sustained  the  directors  in  their  approval  of  the  plan 
of  conversion,  to  say  nothing  of  the  fact  that  the  by-laws  of  the 
corporation  expressly  provided  that  directors  might  be  interested 
in  contracts  with  the  corporation,  and,  further,  "  that  .  .  .  any 
act  or  contract  that  shall  be  approved  or  ratified  by  the  vote  of 
the  holders  of  a  majority  of  the  capital  stock  of  the  company 
.  .  .  shall  be  as  valid  and  binding  upon  the  corporation  and 
upon  all  the  stockholders  as  though  it  had  been  approved  or 
ratified  by  every  stockholder  of  the  corporation,"  the  court  held 
that  the  infirmity  in  the  contract  had  been  entirely  eliminated, 
and  that  the  ratification  of  the  agreement  and  plan  was  complete. 


234  TRUSTS,    POOLS  AND   CORPORATIONS 

The  complainants  then  attempted  to  show  that  less  than  the 
necessary  amount  of  stock  was  legally  voted,  by  setting  up  the 
plea  that  the  members  of  the  syndicate  had  no  right  to  vote  for 
the  ratification  of  a  scheme  in  which  they  were  personally  inter- 
ested as  opposed  to  the  interest  of  the  corporation,  thus  affirm- 
ing the  doctrine  that  the  rights  of  a  stockholder,  when  he 
becomes  a  director,  are  limited  by  the  director's  obligation  to  the 
corporation,  which,  it  was  alleged,  was  violated  in  the  present 
instance,  and  going  so  far  as  to  impose  a  similar  obligation  upon 
a  stockholder  who  was  not  a  director.  This  argument  was 
stated  as  follows  :  .  .  .  "  It  is  contended  that  where  a  large 
number  of  stockholders  conspire  to  impose  a  burden  upon  a 
corporation  for  their  own  benefit,  ignoring  the  interest  of  the 
corporation,  they  thereby  become  constructively  trustees  for  their 
fellow-stockholders,  assume  the  obligations  of  trustees  toward 
their  fellow-stockholders,  and  must  deal  with  them  accordingly." 

The  defendants  replied,  and  the  court  agreed  with  them,  that 
a  stockholder  can  never  be  deprived  of  his  right  of  ownership 
in  a  corporation  and  of  the  right  to  vote  the  number  of  shares 
which  he  holds  upon  any  question  affecting  his  interest.  Judge 
Van  Syckel  remarked  in  his  opinion  : 

They  [the  directors]  voted  upon  that  resolution,  not  as  directors,  not 
in  their  fiduciary  capacity,  but  solely  in  the  right  of  the  shares  of  stock 
held  by  them.  A  most  valuable  privilege,  which  attaches  to  the  own- 
ership of  stock  in  a  corporation,  is  the  right  to  vote  upon  it  at  any 
meeting  of  stockholders.  As  to  the  resolution  considered  by  itself,  as 
stockholders,  they  owed  no  greater  duty  to  their  co-stockholders  than 
those  stockholders  owed  to  them.  Like  other  stockholders,  they  had  a 
right  to  be  influenced  by  what  they  conceived  to  be  for  their  own  inter- 
est, and  they  cannot  lawfully  be  denied  that  right,  nor  can  it  be  limited 
or  circumscribed  by  the  fact  that  they  occupied  the  position  of  directors 
in  the  company. 

But,  continued  the  complainants,  granted  that  the  vote  was 
legal  on  the  assumption  that  the  stockholders  fully  understood 
the  nature  of  the  resolutions  upon  wbich  they  were  voting,  that 
assumption  was  contrary  to  the  facts.  The  stockholders  were 
not  aware  of  the  nature  of  the  contract  already  made  with  the 
syndicate,  nor  with  the  extent  of  the  personal  interest  of  the 


STEEL   CORPORATION    BOND   CONVERSION  235 

directors  in  this  contract.  The  only  information  in  regard  to 
these  matters  contained  in  any  of  the  documents  sent  to  the 
stockholders,  appears  in  the  circular  of  April  17,  and  was  as 
follows :  "  To  further  the  success  of  the  plan,  there  has  been 
formed  a  syndicate,  including  some  directors,  which  will  receive 
four-fifths  of  the  4  per  cent  compensation  to  be  paid  under 
the  contract  with  Messrs.  J.  P.  Morgan  &  Co.  mentioned  in  the 
notice  of  stockholders'  meeting."  It  was  further  stated  in 
the  notice  of  the  stockholders'  special  meeting,  that  copies  of 
the  directors'  resolution,  in  which  the  nature  of  the  contract 
was  explained,  and  of  the  contract  itself,  could  be  obtained  on 
application  at  Morgan  &  Co.'s  office.  This  notice,  the  com- 
plainants asserted,  was  insufficient  to  acquaint  the  stockholders 
with  the  nature  of  these  contracts  which  they  were  asked  to 
approve. 

The  defendants  replied  in  the  words  of  a  decision  upon  another 
case  cited  in  the  brief  of  the  defendants  upon  appeal : 

If  the  party  notified  make  reasonable  investigation,  he  obtains  actual 
knowledge  of  these  facts  ;  if  he  choose  not  to  make  it,  he  is  charged 
constructively  with  knowledge  of  them.  ...  If  he  is  unwilling  to  act 
upon  the  facts  as  the  notice  presents  them,  then  the  law  demands  that 
he  shall  make  proper  examination,  and  upon  the  result  of  that  examina- 
tion he  may  safely  stand.  .  .  .  But,  if  he  prefer  not  to  examine,  it 
must  be  because  he  is  satisfied  to  act  as  if  the  matters  disclosed  in  the 
notice  were  true,  and  he  cannot  afterward  complain  if  his  rights  are 
made  to  rest  upon  them  so  far  as  they  are  true.  The  information  given 
by  the  notice  is  equivalent  to  that  obtained  by  the  inquiry.^ 

This  principle  has  been  established  in  a  number  of  cases.  It 
was  reafifirmed  by  the  Court  of  Appeals  in  its  decision  that  the 
information  furnished  to  the  stockholders  of  the  Steel  Corpora- 
tion in  regard  to  the  various  contracts  and  resolutions  was  suffi- 
cient to  put  them  on  inquiry.  In  fact,  so  little  question  was 
raised  at  the  time  concerning  the  expediency  of  the  scheme  that 
no  stockholder  applied  to  J.  P.  Morgan  &  Co.  for  a  copy  of  the 
contract.  The  defendants  were,  therefore,  apparently  justified 
in  their  claim  that  the  stockholders  received  all  the  information 
which  they  required. 

^  Gale  V.  Morris,  3  Stew.  285,  289,  290. 


236  TRUSTS,    POOLS   AND   CORPORATIONS 

The  Charge  of  Fraud 

The  evidence  submitted  by  the  complaining  stockholders  to 
substantiate  their  charge  of  fraud  lay  in  the  nature  of  the  trans- 
actions in  controversy.  They  claimed  that  the  conversion 
scheme  was  bound  up  with  tlie  syndicate  agreement ;  that  it 
would  not  have  been  brought  forward  had  it  not  been  for  the 
benefits  which  the  syndicate  was  to  derive ;  and  that  the  com- 
pensation received  by  the  syndicate,  and  the  privileges  allotted 
to  it,  were  unreasonable  and  extortionate. 

Here  was  a  corporation,  they  said,  in  urgent  need  of  at  least 
$50,000,000  to  complete  improvements  already  begun,  and  to 
undertake  further  improvements  whose  completion  would  add 
at  least  ^10,000,000  to  its  profits.  This  money  was  to  be 
borrowed  on  the  security  of  a  second  mortgage.  The  interest 
was  to  be  provided  by  converting  a  7  per  cent  dividend 
charge  on  $200,000,000  of  preferred  stock  into  a  5  per  cent 
interest  charge  on  the  same  amount  of  bonds.  Ostensibly  to 
insure  the  success  of  this  plan,  the  aim  and  object  of  which  was 
to  raise  a  certain  amount  of  cash,  an  underwriting  scheme  was 
devised,  which,  however,  entirely  subordinated  the  raising  of 
cash  to  the  conversion  of  stock  into  bonds.  The  underwriting 
plan  devised  by  the  directors  undertook  to  guarantee,  not  the 
amount  of  cash  required,  but  a  plan  of  conversion  whose  com- 
plete success  would  not  have  increased  the  security  of  the  pro- 
posed bond  issue,  nor  have  rendered  the  bonds  more  attractive 
in  the  eyes  of  investors, — a  measure,  moreover,  which  made 
inadequate  provision  for  the  real  needs  of  the  corporation.  The 
syndicate,  in  other  words,  instead  of  guaranteeing  to  take 
$50,000,000  of  bonds  at  par,  and  to  pay  for  these  bonds  in  cash, 
which  the  commonly  understood  principles  of  underwriting 
demanded,  agreed  to  take  only  $20,000,000  of  bonds  at  par,  for 
which,  after  deducting  their  assured  commission  of  $4,000,000 
on  the  $100,000,000  of  bonds  whose  purchase  with  cash  and 
stock  they  had  guaranteed,  the  corporation  would  receive  only 
$16,000,000  of  cash.  Moreover,  if  the  amount  of  bonds  remain- 
ing should  be  taken  by  the  stockholders,  the  additional  commis- 
sions of  the  syndicate  would  reduce  their  actual  cash  guarantee 


STEEL   CORPORATION    BOND    CONVERSION  237 

to  ^11,200,000,  or  little  more  than  one-fifth  of  the  amount  which 
the  stockholders  have  been  told  was  necessary.  OtMhe  basis 
of  the  actual  cash  furnished,  the  commission  to  the  syndicate, 
assuming  that  the  plan  was  successfully  carried  out,  would  be 
44  per  cent,  —  an  extraordinary  and  unreasonable  compensation. ^ 
Furthermore,  in  answer  to  the  argument  set  forth  in  the  afB- 
davit  of  Mr.  Perkins,  in  which  he  claimed  that,  in  the  opinion  of 
the  Finance  Committee  of  the  Steel  Corporation,  the  immediate 
effect  of  the  announcement  of  the  contemplated  withdrawal  of 
40  per  cent  of  the  preferred  stock  would  be  to  send  its  price 
above  par,  and  so  make  conversion  unattractive,  and  that  the 
necessity  of  segregating  a  large  amount  of  preferred  stock  in 
order  to  make  sure  that  at  least  $80,000,000  of  stock  would  be 
exchanged,  as  provided  by  the  syndicate  agreement,  involved 
great  risk  and  the  locking  up  of  a  large  sum  of  money 
for  a  considerable  time,  the  complainants  urged  that,  in  any 
event,  the  bonds,  which  were,  on  the  admission  of  the  Fi- 
nance Committee  of  the  Steel  Corporation,  a  higher  grade  secur- 
ity than  the  preferred  stock,  —  else  why  convert  the  stock 
into  bonds  ?  —  would  always  sell  at  a  higher  price  than  the 
stock,  and  that,  therefore,  the  necessity  of  guaranteeing  the  con- 
version did  not  appear.  There  could  be  no  reasonable  doubt 
that  the  corporation  could  sell  $20,000,000  of  its  second  mort- 
gage bonds  for  more  than  $16,000,000,  the  maximum  amount  of 
cash  which  it  stood  to  receive  from  the  syndicate.  The  assur- 
ance given  by  the  syndicate  that  the  amount  required  for  dis- 
tribution to  the  security  holders  would  be  decreased  $1,500,000 
per  year  could  have  no  effect  upon  the  price  of  the  bonds,  and 
could  therefore  lend  only  indirect  assistance  to  the  conversion. 
Moreover,  a  large  amount  of  this  $80,000,000  preferred  stock 
was  already  the  syndicate's  property  at  the  time  the  contract 
was  made ;  and,  so  far  from  locking  up  funds  in  fulfilling  their 
agreement,  the  members  of  the  syndicate  were  in  reality  increas- 
ing the  value  of  their  property.  In  short,  it  was  claimed  that 
the  guarantee  of  the  syndicate  contained  an  inconsiderable 
benefit  for  the  Steel  Corporation,  in  return  for  which  the  syndi- 
cate was  to  receive  a  large  cash  commission. 

1  Argument  of  Edward  B.  Whitney  for  Appellees,  p.  21. 


238  TRUSTS,    POOLS  AND   CORPORATIONS 

The  Charge  of  Discrimination 

In  support  of  the  charge  of  discrimination,  the  complainants 
argued  that  the  plan  created  two  classes  of  subscribers  to  the 
new  bonds:  (i)  the  syndicate;  (2)  the  other  preferred  stock- 
holders. Class  I  were  offered  the  bonds  at  96;  class  2,  at  100. 
Class  I  had  an  option  on  part  of  the  bonds  for  seven  and  one- 
half  months,  and  an  option  on  such  portion  of  the  remainder 
as  were  not  taken  by  the  preferred  stockholders  for  sixteen  and 
one-half  months,  which  period  could  be  extended  by  agreement 
between  the  syndicate  and  the  directors.  Class  2  had  an  option 
limited  to  fifty-eight  days.  Class  i  could  exchange  their  hold- 
ings of  preferred  stock  to  any  amount,  while  class  2  were  Hmited 
to  40  per  cent  of  their  preferred  stock  holdings.  "  The  syndi- 
cate," said  the  complainants,  "after  cutting  off  the  preferred 
stockholders  not  in  the  syndicate  by  the  thirty  (or  fifty-eight) 
days'  notice,  could,  at  any  time  before  the  first  day  of  January, 
1904  (and  later  by  means  of  extending  the  time),  purchase  1000 
shares  of  preferred  stock  at  the  market  price,  —  say  83,  —  pay- 
ing therefor  $83,000;  then  call  upon  the  Steel  Corporation 
under  one  of  the  options  to  deliver  to  them  bonds  to  the  amount 
of  $100,000  in  exchange  for  the  1000  shares  of  stock,  and  sell 
the  bonds  at  the  market  price,  —  say  95,  —  thus  making  $12,000 
without  the  slightest  troul3le  or  expense,  except  that  which  would 
attend  a  few  minutes'  clerical  work.  And  this  process  could  be 
repeated  in  larger  or  smaller  amounts  from  time  to  time,  when- 
ever the  relative  market  prices  of  the  stock  and  bonds  should 
make  it  profitable  to  do  so.  Would  not  this  be  a  palpable 
injustice  to  stockholders  of  the  corporation,  and  especially  to 
the  preferred  stockholders,  not  members  of  the  syndicate,  who 
had  exchanged  40  per  cent  of  their  preferred  stock  for  bonds.?" 

The  answer  of  Mr.  Perkins  to  this  charge  has  been  already 
referred  to.  He  asserted  that,  without  the  guarantee  of  the 
syndicate,  the  success  of  the  conversion  plan  would  have  been 
endangered  by  the  appreciation  in  the  value  of  the  preferred 
stock.  He  does  not  answer  the  argument  that  the  compensa- 
tion was  excessive  in  consideration  of  the  benefit  received  by 
the  corporation,  except  so  far  as  to  assert  that  the  syndicate 


STEEL   CORPORATION    BOND    CONVERSION  239 

agreement  was  "  a  most  desirable  one  for  the  United  States 
Steel  Corporation,"  but  rests  the  justification  of  the-«eiompensa- 
tion  almost  entirely  on  the  risk  assumed  by  the  syndicate.^  In 
the  Berger  suit,  where  this  point  was  more  fully  discussed,  and 
to  which  constant  reference  was  made  in  the  Hodge  litigation, 
the  expediency  of  the  contract  with  the  syndicate  was  justified 
by  the  argument  which  Mr.  Perkins  employed,  and  the  large 
risk  incurred  by  the  syndicate  was  thus  explained  in  the  brief 
of  counsel  for  the  corporation  : 

Is  it  reasonable  to  contend  that  the  tying  up  of  $100,000,000  of  capi- 
tal involves  no  risk  or  consideration  and  warrants  no  compensation? 
Can  it  be  said  that  a  syndicate,  which  undertakes  an  obligation  of 
;^ioo,ooo,ooo  and  for  the  purpose  of  performing  that  obligation  ties  up 
by  actual  deposit  $80,000,000  of  property,  is  furnishing  no  considera- 
tion for  an  agreement  to  pay  a  commission?  Suppose,  pending  action 
by  the  stockholders,  the  preferred  stock  of  the  syndicate  had  fallen  in 
value  from  94  to  87^  (as  it  actually  did)  or  even  lower,  and  there  was 
a  falling  market  occasioned  by  strikes  or  financial  disaster,  who  would 
recompense  the  syndicate  for  the  loss  that  it  would  sustain  by  the  depre- 
ciation of  its  stock?  ...  A  variation  of  four  points  in  the  relative  value 
of  the  seven  per  cent  cumulative  preferred  stock  and  the  new  five  per  cent 
bonds  would  at  once  wipe  out  the  profits  of  the  syndicate  and  turn  the 
venture  into  a  loss.  .  .  .  For  example,  it  may  well  be  that  the  present 
market  value  of  the  proposed  new  five  per  cent  bonds  is  95,  and  that 
the  present  market  value  of  the  preferred  stock  is  88,  a  depreciation  of 
6  per  cent  since  the  syndicate  deposited  the  $80,000,000  of  stock. 
What,  then,  would  be  the  outcome  of  the  risk  of  the  syndicate  if  the 
plan  had  been  disapproved  by  the  stockholders,  or  if  it  should  now  be 
set  aside  by  the  courts?  The  syndicate  has  tied  up  $80,000,000  of 
stock,  which  now  shows  a  loss  of  6  per  cent,  or  $4,800,000,  and  this 
loss  exceeds  the  promised  commission,  which  they  would  not  receive 
if  the  contract  were  not  approved,  and  in  addition  the  syndicate  is 

1  The  following  quotation  from  Mr.  Perkins's  affidavit  is  of  interest  in  this  connec- 
tion: "The  largest  participations  in  the  syndicate  were  taken  only  after  urgent  so- 
licitation by  me  and  upon  my  agreeing  that  my  firm  would  take  an  equal  amount. 
The  participation  taken  by  Mr.  Schwab  and  by  some  of  the  other  directors  was  upon 
the  understanding  that,  if  we  found  other  parties  to  take  any  part  of  such  participa- 
tions, we  would  do  this,  and  thus  release  them.  My  firm  considered,  and  I  believe 
most  of  the  directors  believed,  that  the  syndicate  contract  was  not  a  particularly 
profitable  one  for  the  syndicate.  In  no  instance  did  we  find  any  stockholder  willing 
to  subscribe  for  the  full  amount  of  his  holdings  in  preferred  stock." 


240  TRUSTS,    POOLS   AND   CORPORATIONS 

bound  to  take  $20,000,000  of  bonds,  which  bonds  are  only  worth  95 
in  the  market,  showing  an  additional  loss  of  $1,000,000.  It  is  submitted 
that  the  niere  statement  of  these  facts  must  satisfy  any  court  that  the 
syndicate  has  since  the  first  of  April,  1902,  run  a  very  great  risk,  that 
it  is  still  running  a  great  risk,  that  in  all  fairness  and  propriety  a  reason- 
able compensation  may  be  paid  for  that  risk,  and  that  the  agreed  com- 
pensation is  not  excessive.^ 

It  is  unfortunate  that  the  defendants  did  not  feel  themselves 
compelled  to  legitimate  the  syndicate  agreement,  not  merely 
by  citing  the  risk  undergone,  but,  as  the  complainants  chal- 
lenged them  to  do,  by  showing  a  corresponding  benefit  to  the 
corporation.     As  complainants'  counsel  remarked  : 

The  directors  of  an  industrial  corporation  would  not  be  justified  in 
paying  a  million  dollars  to  a  person  who  offered  to  swim  the  Atlantic, 
unless  they  could  show  that  some  benefit  would  be  conferred  upon  the 
corporation  by  the  accomplishment  of  that  feat.  The  fact  that  the 
gentleman  proposing  the  scheme  insisted  upon  the  enormous  risk  that 
he  ran  would  not  justify  the  directors  in  closing  the  contract. 

It  would  have  been  better,  we  must  admit,  if  only  for  the  sake 
of  gaining  a  larger  measure  of  general  approval  for  their  pro- 
ject, if  the  defendants  had  presented  this  portion  of  their  argu- 
ment in  a  less  general  and  sweeping  manner. 

For  the  immediate  purpose  of  winning  their  case,  however, 
it  was  merely  necessary  for  the  defendants  to  keep  before  the 
court  the  fact  that  the  contract  between  the  Steel  Corporation 
and  Messrs.  J.  P.  Morgan  &  Co.  was  approved  of  by  more  than 
99|-  per  cent  of  the  stockholders  represented  at  the  special 
meeting.  Behind  this  fact,  in  passing  upon  the  legitimacy  of 
the  transaction,  in  the  absence  of  specific  proof  of  fraud,  the 
court  could  not  go.  As  Vice-Chan cellor  Emery  said  in  his 
opinion  which  was  quoted  in  the  decision  of  the  appellate 
court : 

The  reasonableness  or  judiciousness,  in  the  business  aspect,  of  a 
reduction  of  the  preferred  stock  of  the  Steel  Corporation,  and  the 
distribution  of  capital  resulting  therefrom,  by  the  conversion  of  stock 
into  bonds,  is  .  .  .  altogether  a  matter  of  management  of  the  affairs 

1  Brief  on  Behalf  of  Defendants  —  appellants  in  Miriam  Berger  v.  United  States 
Steel  Corporation,  pp.  42,  43,  44. 


STEEL   CORPORATION    BOND   CONVERSION  241 

of  the  corporation,  upon  which  the  decision  of  the  directoxa-and  stock- 
holders given  in  the  manner  required  by  law  is  final,  so  far  as  it  relates 
to  its  business  aspects. 

And  Judge  Van  Syckel,  in  the  final  decision,  stated  the  same 
principle  in  more  general  terms,  quoting  from  his  opinion  in  the 
Berger  case : 

The  manner  in  which  a  duly  authorized  plan  is  to  be  carried  through 
is  part  of  the  business  of  the  corporation,  and,  in  the  absence  of  fraud 
or  bad  faith,  is  not  the  subject  of  judicial  control  to  any  greater  extent 
than  any  other  business  of  the  corporation.  The  court  cannot  substitute 
its  judgment  for  that  of  the  directors  and  majority  stockholders,  and  say 
that  a  less  expensive  plan  could  be  successfully  adopted. 

In  short,  so  long  as  the  directors  acted  in  good  faith  and  with 
entire  frankness,  they  might,  unless  expressly  forbidden  by  the 
law,  have  converted  all  their  preferred  stock  into  a  6  or  7  per 
cent  bond;  they  might  have  incurred  a  floating  debt  equal  to 
their  mortgage  indebtedness ;  they  might  have  abolished  the 
charge  for  depreciation ;  they  might  have  paid  their  president 
a  salary  of  $5,000,000  per  year.  In  fact,  they  might  have  vio- 
lated many  rules  of  business  prudence  if  only  they  could  secure 
the  approval  of  a  majority  of  the  stockholders.  In  New  Jersey, 
a  stockholder,  generally  speaking,  is  allowed  to  do  what  he  will 
with  his  own. 

That  the  court  was  convinced  of  the  honesty  and  good  faith 
of  the  transaction  appears  from  the  expression  of  Justice  Van 
Syckel : 

There  is  an  entire  absence  in  the  case  of  anything  to  show  a  taint 
of  fraud,  or  an  attempt  to  conceal  from  the  shareholders  any  fact  which 
should  have  influenced  their  action.  That  the  entire  proceeding  was 
conducted  with  good  faith,  without  concealment,  and  with  fairness  to 
both  parties,  is  evinced  by  the  fact  that  during  all  the  litigation  which 
has  ensued,  under  the  promotion  of  a  shareholder  who  did  not  attend 
the  meeting,  not  one  of  the  vast  number  of  shareholders  who  were  pres- 
ent in  person  or  by  proxy,  comprising  men  of  great  business  capacity, 
interested  to  the  extent  of  millions  of  dollars  in  the  conversion  plan,  has 
questioned  its  propriety,  or  expressed  a  desire,  so  far  as  appears,  to  recede 
from  it. 


242  TRUSTS,    POOLS   AND    CORPORATIONS 

The  Valuation  of  the  Assets 

A  New  Jersey  corporation  cannot  convert  preferred  stock  into 
bonds  unless  its  assets,  after  the  deduction  of  all  indebtedness, 
are  equal  to  its  preferred  stock.i  j^  their  attempt  to  prevent 
the  conversion  of  preferred  stock  into  bonds,  the  complaining 
stockholders  laid  final  emphasis  upon  the  alleged  fact  that  the 
assets  of  the  Steel  Corporation  were  not  worth  the  necessary 
amount;  namely,  $880,024,900.  In  proof  of  this  assertion,  the 
complainants  rehed  mainly  upon  the  affidavits  of  one  James  H. 
Lancaster,  who  represented  himself  to  be  "a  mechanical  and 
mining  engineer  and  expert  on  ores  and  steel  and  iron  properties 
and  their  products."  .  .  .  Mr.  Lancaster  made  two  afifidavits  in 
the  suit,  —  the  first,  a  preliminary  affidavit,  on  July  3,  1902,  and 
the  second,  in  more  detail,  on  July  14. 

In  his  first  affidavit,  Mr.  Lancaster  stated  that  he  was  "familiar 
with  and  had  made  a  study  of  all  the  various  properties  and 
plants"  of  the  Steel  Corporation,  that  the  plants  and  properties 
could  be  duplicated  for  about  $300,000,000,  and  that  the  total 
value  of  all  the  properties,  including  good  will  and  organization, 
was  not  worth  $500,000,000. 

Two  weeks  later,  Mr.  Lancaster,  in  his  second  affidavit,  went 
into  the  subject  of  valuation  in  more  detail,  and  presented  the 
statement  upon  which  this  portion  of  the  complainants'  case  was 
to  depend.  He  stated,  first,  that  the  plants  of  the  Carnegie 
company,  representing  44  per  cent  of  the  productive  capacity 
of  the  Steel  Corporation,  had  been  valued  on  March  12,  1900, 
by  the  partners  of  the  Carnegie  Steel  Company  at  $75,600,000. 
This  valuation  was  stated  in  the  answer  of  the  company  to 
Mr.  Frick's  bill  of  complaint  to  be  "a  full,  fair,  and  accurate 
valuation  of  these  assets,"  and  also  that  "the  experience  and 
judgment  of  business  men  justify  us  in  saying  (as  we  do)  that 
such  a  method  of  valuation  in  large  manufacturing  companies, 
and  especially  of  iron  and  steel  in  our  country,  as  a  rule,  is  more 
liberal  to  the  seller  than  to  the  buyer  ;  for  experience  has  shown 
that  partnership  assets  on   a  just  appraisement  seldom  reach 

iThis  was  the  act  of  March  28,  1902,  under  which  provisions  the  plan  of  exchang- 
ing bonds  for  preferred  stock  was  authorized. 


STEEL   CORPORATION    BOND    CONVERSION 


243 


the  value  at  which  they  stand  on  the  books  of  the  concern." 
Mr.  Lancaster,  accepting  this  statement  as  accuratG^'estimatcd 
the  total  value  of  the  Steel  Corporation's  properties,  upon  the 
basis  of  the  1900  valuation  of  the  Carnegie  properties,  and 
including  $27,000,000  of  Frick  Coke  Company  assets  subse- 
quently added,  at  ;^200,ooo,ooo. 

He  also  presented  a  table  showing  the  conversion  value  of  the 
securities  of  the  constituent  companies  in  the  securities  of  the 
United  States  Steel  Corporation,  as  follows : 


Common 
Stock 

Preferred 
Stock 

Bonds 

Constituent  companies 

United  States  Steel  Corporation     .     . 

$300,000,000 
508,000,000 

^247,000,000 
510,000,000 

$219,000,000 
362,000,000 

Increase 

;^  208,000,000 
69 

^263,000,000 
106 

^143,000,000 
65 

Percentage  of  increase 

The  inference  drawn  from  this  comparison  of  capitalizations  was 
that,  unless  the  capital  of  the  constituent  companies  was  far 
below  the  value  of  their  assets,  the  capitalization  of  the  United 
States  Steel  Corporation  greatly  exceeded  the  value  which  sup- 
ported its  securities.  Mr.  Lancaster  concluded  his  affidavit  by 
expressing  the  opinion  that  the  1902  earnings  of  the  United 
States  Steel  Corporation  represented  the  results  of  an  exception- 
ally prosperous  condition  of  the  market,  and  that  many  new 
plants  were  then  building  to  compete  with  the  corporation  in 
all  its  departments. 

The  arguments  of  complainants'  counsel  in  support  of  these 
affidavits  were  mainly  taken  up  with  showing  that  the  iron  and 
steel  trade  was  subject  to  sudden  and  extreme  reverses  and  to 
long  periods  of  depression,  and  that  these  contingencies  had  not 
been  allowed  for  in  the  capitalization  of  the  Steel  Corporation. 
They  contended:  (i)  that  the  value  of  a  group  of  assets  was 
based  on  the  selling  price  of  those  assets,  which  in  turn  de- 
pended solely  upon  their  earning  power,  and, that,  while  the 
Steel  Corporation  was  then  earning  interest  and  dividends  on 
all  classes  of  its  securities,  there  was  no  assurance  that  these 


244  TRUSTS,    POOLS  AND   CORPORATIONS 

earnings  would  be  sufficiently  permanent  to  warrant  the  belief 
that  the  selling  value  of  the  company's  assets  could  properly  be 
based  upon  a  capitalization  of  their  amount;  (2)  that  the  1902 
price  of  steel  was  an  abnormal  price,  dependent  on  temporary 
conditions,  and  resulting  in  earnings  which  should  be  disregarded 
in  making  an  estimate  of  the  ability  of  the  corporation  to  pay 
the  large  increase  in  interest  charges  which  would  result  from 
the  success  of  the  conversion  plan;  (3)  they  asserted  that  the 
directors  of  the  Steel  Corporation  were  about  to  carry  through 
a  plan  which  was  not  merely  unnecessary  and  expensive,  but 
dangerous  as  well,  —  a  plan  which  would  increase  its  mortgage 
debt  beyond  what  experience  showed  would  be  the  minimum 
value  of  its  assets,  a  plan  whose  success  spelled  bankruptcy, 
should  the  history  of  the  steel  trade  be  repeated.  The  argument 
of  the  complainants,  in  brief,  was  based  entirely  on  considera- 
tions of  business  probability,  and  on  the  results  of  business 
experience.  Affirming  that  the  requirements  of  the  New  Jersey 
corporation  law  were  designed  for  the  protection  of  the  investor, 
they  asked  the  court  to  interpret  the  meaning  of  the  statute  in 
the  light  of  business  probability,  and  to  refuse  its  sanction  to  a 
measure  which  conservative  judgment  would  disapprove.^ 

This,  however,  as  shown  by  its  refusal  to  throw  out  the  con- 
version plan  because  of  its  alleged  expensiveness,  the  court  was 
not  prepared  to  do.  So  long  as  the  requirements  of  the  law 
were  comphed  with,  which  in  this  case  meant  a  certification  by 
the  officers  of  the  corporation  that  its  assets,  after  deducting  all 
indebtedness,  were  equal  in  value  to  the  amount  of  its  preferred 
stock,  and  in  the  absence  of  fraud,  the  court  had  no  right  to 
interfere. 

This  certification  was  furnished  in  a  series  of  affidavits  remark- 
able because  of  their  prodigal  frankness  and  the  varied  standards 
of  valuation  which  they  set  up.  The  subject-matter  of  these 
affidavits,  so  far  as  they  relate  to  the  question  of  assets,  may  be 

1  Argument  of  Edward  B.  Whitney  (p.  41)  :  "I  submit  that  the  sole  object  of  the 
Legislature  in  establishing  this  restriction  as  to  the  amount  of  assets  was  to  make 
the  recapitalization  entirely  safe  for  at  least  the  preferred  stock,  ...  to  secure  that 
in  case  of  insolvency  a  foreclosure  of  the  new  bonds  would  result  in  the  realization 
of  the  full  value  of  the  preferred  stock  if  the  latter  were  properly  protected." 


STEEL   CORPORATION    BOND   CONVERSION 


245 


divided  as  follows  :  (i)  valuations  of  property  ;  and  (2)  estimates 
of  future  earnings.  The  leading  affidavit  for  the^efendants 
was  made  by  Mr.  Schwab,  who  swore  to  the  statement  that  the 
total  value  of  the  corporation's  assets,  without  making  any  allow- 
ance for  good  will  and  estabhshed  business,  patents,  trade-marks, 
and  processes,  or  for  $150,000,000  of  orders  on  hand,  exceeded 
the  total  amount  of  its  capitalization.  This  statement  was  not 
made  in  general  terms,  but  was  supported  by  a  hst  of  assets, 
giving  the  value  assigned  to  each  and  the  basis  of  valuation  em- 
ployed. For  purposes  of  convenience,  the  material  of  this  affi- 
davit has  been  arranged  in  the  following  table  : 


I.    Iron   and   ore   prop- 
erties. 


2.  Plants,  mills,  fixtures, 

machinery,  equip- 
ment, tools,  and 
real  estate. 

3.  Coal  and  coke  fields 

(87,589  acres). 

4.  Transportation  prop- 

erties. 


5.  Blast  furnaces. 

6.  Natural  gas  fields. 

7.  Limestone      proper- 

ties. 

8.  Cash  and  cash  assets. 


$700,000,000 


$300,000,000 


$100,000,000 


$80,000,000 
after  de- 
ducting 
$40,340,000 
of  bonded 
debt. 

$48,000,000 
$20,000,000 
$4,000,000 


$214,278,000 


Principles  governing  Valuation 


1.  Properties  cannot  be  duplicated  at  any 

price. 

2.  Yield   direct   profit   of  $30,000,000  on 

present  price  of  ore. 

3.  The   Steel  Corporation  would  be  com- 

pelled  to   pay  $700,000,000   in  order 
to  obtain  these  deposits. 

1.  Impossibility  of  duplicating  these  mills 

for  a  less  amount. 

2.  The  mills  are  necessary  to  make  the 

profits  of  the  corporation,  stated  to  be 
at  the  rate  of  $140,000,000  per  year. 

I.  Net.  profits  to  the  corporation,  based 
on  the  present  prices  of  coal  and  coke, 
over  $12,000,000. 

1.  Cost  of  duplication. 

2.  Profits  of  mills  increased  $10,000,000, 

because  of  possession  of  transportation 
facilities. 


I.  Cost  of  duplication. 

I .  Profit  of  $2,000,000. 

1.  Cost  of  duplication, 

2.  Profit  of  $500,000. 

I.  Cash  assets  valued  at  cost. 


246  TRUSTS,    POOLS   AND    CORPORATIONS 

Mr.  Schwab  employs  two  leading  principles  in  valuing  these 
assets, — (i)cost  of  duplication  and  (2)  profits  derived  from 
their  possession.  Of  his  estimate  of  $140,000,000  as  the  earn- 
ings of  the  corporation,  $54,500,000  is  directly  accounted  for  by 
the  savings  on  ore,  coal  and  coke,  transportation,  limestone,  and 
natural  gas.  The  direct  profits  of  the  mills  easily  make  up  the 
remainder. 

Mr.  Schwab's  affidavit  was  supplemented  by  the  affidavits  of 
other  officials.  Mr.  Elbert  H.  Gary,  chairman  of  the  Finance 
Committee,  testified  that  the  "intrinsic  value  "  of  the  properties, 
as  set  forth  by  Mr.  Schwab,  were  true  and  conservative.  Mr. 
James  Gayley,  first  vice-president,  and  in  general  charge  of  the 
mining  and  transportation  of  raw  material,  stated  in  his  affidavit 
that  the  ore  properties  of  the  corporation  were  not  only  the  most 
extensive  known,  but  were  of  such  high  grade  and  quality  as  to 
make  them  specially  suited  to  the  production  of  the  best  quality 
of  iron  and  steel ;  and  :  "  that  investigations  have  demonstrated 
that  the  deposits  of  this  region  are  practically  circumscribed  as 
to  quality,  and  that,  if  any  new  deposits  are  to  be  found,  it  will 
undoubtedly  be  at  points  which  are  much  further  removed  from 
sites  suited  to  the  economical  manufacture  and  distribution  of 
product,"  and,  further,  "  that  they  could  not  be  duplicated  or 
reproduced  at  any  price." 

President  Lynch,  of  the  Frick  Coke  Company,  supported  Mr. 
Schwab's  statement  by  the  assertion  that  the  315,000,000  tons 
of  coking  coal  still  contained  in  the  Connellsville  basin  were 
worth,  on  a  profit  of  50  cents  per  ton, — 75  cents  below  the 
profit  then  being  made,  —  $157,500,000.  President  James  H. 
Reed  of  the  Pittsburg,  Bessemer  &  Lake  Erie  Railroad  Com- 
pany, in  perhaps  the  most  carefully  worded  affidavit  of  the  series, 
affirmed  that  the  cost  of  the  transportation  properties  of  the  cor- 
poration, after  deducting  the  amount  of  their  bonded  debt,  was 
approximately  $50,000,000,  and  that  their  cost  of  duplication 
would  be  far  in  excess  of  this  amount,  since  in  many  cases  it 
would  be  impossible  to  duplicate  these  facilities.  The  final  affi- 
davit as  to  the  value  of  the  property  was  made  by  William  J. 
Filbert,  comptroller  of  the  Steel  Corporation,  who  stated  that 
on  the  basis  of  the  highest  prices  reached  for  the  two  stocks, 


STEEL   CORPORATION    BOND    CONVERSION  247 

the  total  market  value  of  all  the  corporation's  securities  was 
$1,149,014,932.  -^'' 

The  defendants  were  also  at  considerable  pains  to  controvert 
the  statements,  sworn  to  in  the  Carnegie-Frick  litigation  of  1900, 
that  $75,600,000  represented  a  "  full,  fair,  and  accurate  valuation 
of  the  Carnegie  Steel  Company's  assets."  James  J.  Campbell, 
auditor  and  assistant  secretary  of  the  Carnegie  company,  in  his 
affidavit  demolished  the  truth  of  the  statement  made  by  the 
defendants  in  Frick  v.  The  Carnegie  Steel  Coinpany.  He  showed 
that  all  the  properties  of  the  Carnegie  Steel  Company  had  been 
carried  on  the  books  for  many  years  at  the  original  costs,  and 
that  no  allowance  had  ever  been  made  for  the  money  expended 
on  them  for  improvements,  which  in  some  instances  far  exceed 
the  original  outlay.  The  question  at  issue  in  the  Frick-Carnegie 
litigation,  said  Mr.  Campbell,  did  not  concern  the  actual  value  of 
the  Carnegie  company's  property,  but  merely  involved  the  basis 
of  settling  for  the  interests  of  deceased  or  withdrawing  partners. 
Mr.  Schwab  also  took  the  same  ground  in  his  affidavit :  "  It  was 
claimed  in  such  litigation,  and  such  was  the  fact,  that  the  book 
value  did  not  represent  the  actual  value  of  the  properties.  Under 
the  terms  of  the  agreement  to  which  Mr.  Frick  was  a  party,  it 
was  provided  that  the  book  value  should  determine  the  interests 
of  the  several  associates,  and  the  controversy  between  Mr.  Frick, 
on  the  one  hand,  and  Mr.  Carnegie  and  his  associates,  on  the 
other,  was  as  to  whether  this  nominal  book  value  should  control, 
or  the  actual  value,  which  Mr.  Frick  alleged  to  be  in  excess  of 
$250,000,000." 

The  defendants  did  not  stop  with  estimates  of  present  valua- 
tion. They  accepted  the  standard  of  business  probability  which 
the  complainants  claimed  should  be  applied  to  determine  the 
value  of  the  Steel  Corporation's  assets,  and  asserted  that,  in 
their  judgment,  the  earnings  of  the  Steel  Corporation  would 
never  fall  so  low  as  to  endanger  the  interest  on  the  second 
mortgage  bonds.  As  a  matter  of  record,  these  predictions 
should  be  preserved. 

Mr.  Schwab  stated  that,  if  the  conversion  plan  were  carried 
through,  the  fixed  charges  of  the  corporation  —  he  makes  no 
allowance  for  depreciation  —  would  be  $31,737,850.     The  earn- 


248  TRUSTS,    POOLS   AND    CORPORATIONS 

ings  of  the  corporation  were  then  more  than  four  and  one-half 
times  this  amount,  leaving  a  margin  of  75  per  cent  above  the 
danger  of  bankruptcy.  "  The  most  careful  investigation,"  said 
Mr.  Schwab,  "  was  made  at  the  time  the  board  of  directors  voted 
to  recommend  the  issue  of  $250,000,000  of  second  mortgage 
bonds,  to  determine  whether,  under  any  reasonable  possible  con- 
ditions, the  earnings  of  the  Steel  Corporation  would  be  reduced 
below  the  total  fixed  charges  of  $31,737,850.  The  unanimous 
opinion  of  the  officers  and  directors  who  had  a  lifetime  of  experi- 
ence in  the  business  was  that,  under  no  conditions  of  the  iron 
and  steel  trade  or  of  business  depression,  was  there  any  reason- 
able likelihood  that  the  earning  capacity  of  these  vast  properties 
would  be  reduced  to  any  such  extent."  This  part  of  Mr. 
Schwab's  affidavit  was  repeated  in  almost  identical  terms  by 
Mr.  Gary,  who  stated  that  the  board  of  directors  was  unani- 
mously of  this  opinion.  It  is  unfortunate  that  these  vigorous 
statements  do  not  start  from  an  assumption  of  at  least  $60,000,000 
of  fixed  charges,  for,  on  Mr.  Schwab's  basis  of  valuation,  a 
$30,000,000  charge  for  depreciation  would  be  none  too  large. 

Under  the  weight  of  this  mountain  of  testimony,  the  argu- 
ments of  the  complainants,  which  they  admitted  were  founded 
on  '^  ex-parte  and  argumentative  affidavits,"  were  crushed  to  the 
ground.  They  were  forced  to  admit  that  their  part  of  the  case 
was  in  a  condition  far  from  satisfactory,  and,  in  fact,  were  unable 
to  bring  any  rebuttal  evidence  or  argument  worthy  of  comment, 
contenting  themselves  with  repeating  their  original  contentions.^ 

Furthermore,  the  appearance  of  Mr.  Lancaster  in  the  case  gave 
the  defendants  an  opportunity  to  impeach  the  good  faith  of  the  suit, 
which  they  did  not  fail  to  improve.  As  an  illustration  of  the  mo- 
tives which  animate  the  movers  in  these  so-called  "strike  suits," 
of  which  it  was  charged  that  this  was  an  example,^  a  portion  of 

1  Extract  from  Section  VIII  of  Brief  for  Complainants  on  Appeal:  "The  com- 
plainants' papers  at  the  commencement  of  this  litigation  were  necessarily  prepared 
hastily,  and  it  is  obvious  that  great  labor  and  a  long  time  would  be  required,  espe- 
cially for  parties  not  having  access  to  the  books  and  papers  of  the  corporation,  to  make 
an  inventory  of  the  property,  even  approximately  accurate.  .  .  .  We  frankly  concede 
that  the  record  on  the  question  of  value  is  not  in  a  satisfactory  condition  from  the 
complainants'  point  of  view." 

2  See  page  176  infra. 


STEEL   CORPORATION    BOND   CONVERSION  249 

the  affidavit  of  Joseph  E.  Corrigan,  an  attorney  in  the  office  of 
Guthrie,  Cravath  &  Henderson,  may  be  advantageousi3^presented. 
Mr.  Corrigan  stated  that  on  August  15  Mr.  Lancaster,  on  his  own 
initiative,  made  to  him  and  Mr.  Guthrie  substantially  the  follow- 
ing statement : 

"That  on  the  third  day  of  July,  1902,  a  young  man  nam.ed 
Preskauer  handed  them  the  business  card  of  the  law  firm  of 
James,  Schell  &  Elkus,  and  told  him  that  Mr.  Elkus  wanted  to 
see  him  at  his  (Elkus')  office.  That  he  at  once  proceeded  to  said 
office,  and  there  for  the  first  time  met  Mr.  Elkus  whom  he  had 
never  known  before.  That  he  was  introduced  by  Mr.  Elkus  to 
David  Lamar,  that  said  Lamar  thereupon  talked  to  him  in  the 
presence  of  said  Elkus  about  the  United  States  Steel  Corpora- 
tion's properties  and  their  values,  and  after  some  conversation 
said  that  he  desired  an  affidavit  as  to  the  values ;  that  said  Lan- 
caster did  not  know  and  was  not  told  that  the  affidavit  was  to  be 
used  in  litigation,  and  did  not  observe  any  title  of  a  suit,  to  what 
at  the  time  he  swore  to.  That  he  protested  that  it  was  impossi- 
ble for  him  in  so  short  a  time  to  make  an  affidavit;  but  that  said 
Lamar  said  they  would  be  satisfied  with  his  present  impressions, 
and  what  he  knew  generally  about  the  steel  business ;  and  that 
they  would  give  him  $100  for  the  affidavit.  Said  Lancaster 
further  stated  that  he  needed  the  money,  and  that,  as  this  was 
an  easy  way  to  make  $100,  he  was  willing  to  swear  to  the 
affidavit,  although  he  did  not  know  what  it  was  to  be  used  for, 
and  supposed  it  was  simply  for  said  Lamar's  information,  or  for 
some  purpose  said  Lamar  had  in  mind,  and  that  he  gathered 
from  what  Lamar  said  to  him  that  it  was  to  be  a  guide  for  invest- 
ing in  stocks.  Said  Lancaster  further  stated  to  Mr.  Guthrie  and 
myself  that,  a  few  days  afterwards,  he  for  the  first  time  ascer- 
tained that  his  affidavit  had  been  used  in  a  suit  against  the 
United  States  Steel  Corporation.  That  he  went  at  once  and 
protested  to  Mr.  Lamar  .  .  .  that  he  had  been  deceived.  Said 
Lamar  thereupon  agreed  to  pay  him  $250  a  week  and  $10,000 
when  they  succeeded  in  making  a  settlement,  which  he  (Lamar) 
assured  Lancaster  would  not  be  later  than  November  i.  That 
he  made  a  second  affidavit  in  the  suit,  for  which  he  was  paid 
$400.     That  he  then  had  a  row  with  Lamar  over  the  subject  of 


2  50  TRUSTS,    POOLS   AND    CORPORATIONS 

his  compensation,  that  he  threatened  to  expose  them  all,  and 
that  finally  Lamar  agreed  to  pay  him  ^500,  making  ^1000  in 
all,  provided  said  Lancaster  would  execute  a  general  release  and 
sign  a  letter  to  the  effect  that  he  would  not  disclose  to  any  one 
what  had  occurred  in  Mr.  Elkus'  oi^ce  —  that  he  understood 
from  what  Mr.  Lamar  and  others  said  in  Mr.  Elkus'  office  that 
they  expected  to  make  big  money  out  of  the  suit,  and  that  a 
number  of  the  suits  were  in  preparation  and  would  be  brought 
one  after  another  until  a  settlement  was  forced."-^ 

The  weight  of  the  argument  as  to  the  value  of  the  Steel 
Corporation's  assets  was  plainly  with  the  defendants.  Vice- 
Chancellor  Emery  supported  their  contention  at  every  point. 
He  stated  in  his  opinion  that  the  certificate  of  value  required 
by  the  law  had  been  filed  by  the  proper  officers,  and  that  "  upon 
the  affidavits  filed  there  can  be  no  question  whatever  as  to  their 
honesty  and  good  faith  in  making  this  certificate  as  to  value." 
This  certificate,  it  is  true,  was  not  conclusive  evidence,  but 
might  be  shown  to  be  false.  The  proof  of  its  falsity,  however, 
in  this  case,  had  not  been  furnished.  The  affidavits  filed  by  the 
defendant  company,  said  the  Vice-Chancellor,  on  this  question 
of  the  value  of  the  assets,  are  "  full,  complete,  and  detailed,  and 
are  made  by  persons  entirely  familiar  with  the  property,  or 
portions  of  the  property,  as  to  whose  value  they  affirm.  The 
affidavits  as  to  value  filed  by  complainant  are,  on  the  other 
hand,  general,  vague,  and  made  without  special  knowledge  or 
examination,  and  the  credibility  of  the  principal  affiant  on  the 
part  of  the  complainant  is  seriously  impaired  by  his  own  admis- 
sions in  his  latest  affidavit.  Upon  these  affidavits  as  to  value, 
I  would  not  be  justified  in  enjoining  the  issue  of  the  bonds, 
pending  the  final  hearing."  The  Court  of  Appeals,  while 
passing  upon  the  arguments  of  the  complainant,  apparently  did 
not  consider  the  discussion  of  the  value  of  assets  of  sufficient 
importance  to  even  refer  to  it. 

The  United  States  Steel  Corporation,  in  the  Hodge  suit,  won 
a  complete  victory.     Its  opponents  were  not  merely  routed,  but 

1  Lancaster,  in  a  supplementary  affidavit,  denied  the  correctness  of  some  of  Mr. 
Corrigan's  statements,  but  admits  tlieir  general  correctness,  and  places  himself  in  a 
generally  unfavorable  light. 


STEEL   CORPORATION    BOND   CONVERSION  251 

the  honesty  of  their  motives  was  seriously  impup:ned.  The 
legaUty,  and,  so  far  as  the  court  went  in  this  directi«iT;  the  wis- 
dom of  the  plan  for  converting  bonds  into  stock,  were  upheld. 
The  vindication  of  the  defendants  could  not  have  been  more 
complete. 

There  is,  however,  another  side  to  the  question.  Apart  from 
the  provisions  of  the  New  Jersey  corporation  act  which  the 
directors  were  careful  to  obey,  the  facts  brought  out  by  the 
Berger  and  Hodge  suits  constitute  a  serious  indictment  of 
the  wisdom  of  the  bond  conversion  plan.  Surely,  at  this  late 
day,  few  will  be  found  to  indorse  a  plan  to  change  a  dividend 
requirement  on  ^200,000,000  of  stock  into  an  interest  require- 
ment on  $200,000,000  of  bonds,  for  no  better  reason  than  to 
save  the  interest  and  sinking  fund  charges  on  an  additional 
$50,000,000  of  bonds.  The  mere  statement  of  the  plan,  which 
runs  directly  against  every  recognized  canon  of  corporation 
finance,  is  sufficient  to  secure  its  condemnation.  The  proposal 
ignored  the  mortgage  lien  of  the  bonds  which  were  to  be  sub- 
stituted for  stock,  and  the  fact  that  with  the  issue  of  the  new 
bonds  the  borrowing  capacity  of  the  corporation  would  be  ex- 
hausted, for  the  sake  of  saving  $4,000,000  in  dividend  pay- 
ments, 2  per  cent  of  the  net  profits  of  the  company  in  1902. 

We  have  become  familiar  with  plans  for  the  conversion  of 
bonds  into  stock  where  the  purpose  is  to  reduce  fixed  charges. 
Projects  for  purchasing  stock  with  bonds  secured  by  the  stock 
—  for  example,  the  purchase  of  Burlington,  Jersey  Central,  and 
Louisville  &  Nashville — are  not  uncommon.  In  such  cases, 
the  purchasing  company  can  apply  the  dividends  on  the  stock 
to  the  payment  of  interest  on  the  new  bonds  ;  and  the  lien, 
aside  from  a  guarantee  which  can  be  enforced  only  with  great 
difificulty,  is  on  the  stock  which  the  bonds  were  issued  to  pur- 
chase. Such  projects  have  to  commend  them  either  the  reduc- 
tion of  fixed  charges,  or  the  gaining  control  of  companies  where 
control  means  a  large  increase  in  the  earnings  of  the  parent 
corporation.  But  to  propose  a  conversion  scheme  for  no  better 
reason  than  to  reduce  dividends  in  favor  of  interest,  is  a  propo- 
sition which  has  little  to  commend  it. 


252  TRUSTS,    POOLS   AND   CORPORATIONS 

Then,  too,  can  the  syndicate  agreement,  when  drawn  from 
under  the  healing  wings  of  the  stockholders'  approval,  stand 
the  test  of  critical  examination  ?  The  theory  advanced  by  de- 
fendants' counsel,  that  the  amount  of  the  syndicate's  compensa- 
tion should  be  determined,  not  by  the  benefit  to  the  corporation, 
but  by  the  risk  of  the  syndicate,  would  seem  to  be  untenable. 
Underwriting  syndicates  are  usually  supposed  to  guarantee 
cash.  Their  commission  is  based  upon  the  amount  of  cash  for 
which  they  are  liable.  The  maximum  commission  in  the  case 
under  consideration  was  44  per  cent  of  the  cash  guarantee,  —  an 
amount  out  of  proportion  to  the  benefit  received.  The  argu- 
ment that  it  was  necessary  to  sequester  a  large  amount  of  pre- 
ferred stock  in  advance  of  the  announcement  of  the  conversion 
plan,  because  of  the  practical  certainty  that  the  announcement 
would  raise  the  price  of  the  preferred  stock  above  par  and  make 
conversion  undesirable,  is  singularly  weak.  In  what  manner 
the  placing  of  $12,500,000  of  interest  charges  ahead  of  the 
preferred  stock  dividends,  would  advance  the  value  of  the  latter 
security,  can  better  be  imagined  than  described.  The  course  of 
the  preferred  stock  since  the  conversion  plan  was  announced 
offers  an  interesting  commentary  upon  the  prescience  of  the 
Finance  Committee. 

Space  does  not  permit  an  extended  examination  of  the 
methods  employed  in  valuing  the  assets  of  the  Steel  Corpora- 
tion. At  the  time  these  affidavits  were  made,  there  can  be  no 
question  that,  as  worded,  they  deserved  the  high  praise  awarded 
them  by  the  Vice-Chancellor,  of  being  full,  complete,  and  de- 
tailed, and  of  being  made  in  honesty  and  good  faith.  In  July, 
1902,  the  corporation  was  earning  at  the  rate  of  $140,000,000 
per  year;  and  the  "  present  worth  "  of  its  assets,  which  is  the 
plain  meaning  of  the  law,  was  in  excess  of  $1,400,000,000.  If 
the  argument  of  the  complainants  was  to  stand,  the  law  should 
have  read  something  as  follows:  "that  no  corporation  shall  be 
permitted  to  retire  its  preferred  stock  by  the  issue  of  bonds 
whose  earnings,  in  the  judgment  of  some  competent  tribunal, 
shall  not  at  all  times  be  adequate  to  pay  dividends  on  the  pre- 
ferred stock."  In  such  an  event,  however,  the  question  would 
never  have  come  before  the  court  in  the  course  of  litigation. 


STEEL   CORPORATION    BOND   CONVERSION  253 

It  would  have  been  definitely  settled  beforehand.  As  the  law 
stands,  and  looking  only  to  present  value,  the  ad^tjuacy  of 
Steel  Corporation's  assets  in  July,  1902,  to  conform  to  the 
requirements  is  evident. 

But  what  shall  be  said  of  the  wisdom  of  the  policy  which 
accepts  such  a  valuation  as  a  basis  for  incurring  $10,000,000 
additional  of  fixed  charges  without  corresponding  increase  of 
assets  ?  The  fixed  charges  of  the  Steel  Corporation,  assuming 
that  the  conversion  scheme  had  been  a  complete  success,  and 
making  adequate  allowance  for  depreciation,  would  have  been 
at  least  $70,000,000  per  year.  As  they  now  stand,  with  only 
$150,000,000  of  preferred  stock  exchanged,  they  are  not  far 
from  $65,000,000.1  Here  is  a  necessary  reduction  in  earnings 
before  the  limit  of  fixed  charges  is  reached,  not  of  75  per  cent, 
as  stated  in  the  directors'  affidavits,  but  of  50  per  cent.  There 
will  be  few  persons  found,  who  are  in  any  way  conversant  with 
the  history  of  the  steel  trade,  to  affirm  that  the  earnings  of  any 
steel  corporation  could  not  be  reduced  one-half  by  a  very  mod- 
erate decline  in  prices.  The  Steel  Corporation  averaged  a 
profit  of  $16  per  ton  during  1902.  It  m.ay  fairly  be  questioned 
whether  the  conditions  of  competition  and  demand  warrant  the 
proposition  that  a  profit  of  $8  per  ton  can  be  secured  when  the 
trade  is  at  its  lowest  ebb. 

As  above  remarked,  however,  while  the  directors  were  ready 
to  swear  to  the  belief  that  the  profits  of  the  Steel  Corporation 
would  never  be  reduced  as  low  as  $31,000,000,  they  included  no 
allowance  for  depreciation  in  their  estimate  of  fixed  charges. 
Their  judgment  would  not,  therefore,  be  impeached,  should  the 
earnings  of  the  Steel  Corporation  fall  below  its  fixed  charges. 
If  the  rule  be  accepted,  however,  —  that,  in  issuing  bonds,  a 
corporation  should  always  maintain  a  wide  margin  between 
minimum  net  earnings  and  fixed  charges,  —  it  is  impossible  to 
approve  a  plan  to  add   $12,500,000  to  the  interest  charges  of 

1  This  statement  is  not  based  upon  official  announcements,  but  upon  common 
report  at  the  time  the  life  of  the  syndicate  was  extended.  If  the  gap  between  pre- 
ferred stock  and  bonds  is  not  closed,  there  is  every  reason  to  expect  that  the  opera- 
tions of  the  syndicate  in  purchasing  preferred  stock  for  retirement  will  insure  the 
final  success  of  the  plan  of  commission. 


254  TRUSTS,    POOLS   AND   CORPORATIONS 

the  United  States  Steel  Corporation.  The  fixed  charges  of  the 
company  were  too  high  before  for  entire  safety.  The  issue  of 
1^250,000,000  of  bonds,  or  even  $150,000,000,  can  be  described 
by  no  other  word  than  unwise. 

The  Hodge  and  Berger  suits  may  have  been  inspired  by 
improper  motives,  but  they  have  served  to  call  attention  to  cer- 
tain glaring  defects  in  American  corporation  law.  ,  The  time 
has  gone  by  when  the  determination  of  great  questions  of  cor- 
porate policy,  involving  the  welfare  of  the  community  as  well 
as  the  interests  of  stockholders,  can  be  safely  left  to  their  own 
judgment.  The  average  stockholder  in  corporations  such  as 
the  Steel  Corporation  is  incapable  of  forming  a  judgment  on 
questions  such  as  those  under  discussion.  He  is  one  of  a  flock 
of  sheep  who  follow  first  one  false  shepherd  and  then  another, 
until,  inverting  the  parable,  for  every  sheep  that  is  safely  folded, 
ninety-and-nine  are  hopelessly  led  astray.  He  invests  because 
he  has  confidence  in  some  individual.  Unfortunately,  his  con- 
fidence is  frequently  misplaced.  The  laws  of  those  states,  such 
as  New  Jersey,  in  which  most  large  companies  are  incorporated, 
give  the  stockholders  abundant  protection  against  directors  and 
officers  who  attempt,  by  concealment  and  fraud,  to  violate  their 
trust.  These  laws,  however,  give  no  protection  to  the  stock- 
holder against  his  own  ignorance  and  credulity.  If  the  stock- 
holder was  the  only  one  to  suffer  the  consequences  of  his  own 
simplicity,  there  might  be  no  reason  for  advocating  a  plan  of 
federal  control  which  would  compel  directors  to  follow  a  con- 
servative policy  in  the  distribution  of  earnings  and  the  readjust- 
ment of  capital.  But  where  the  history  of  each  day  is  furnishing 
new  evidence  that  the  prosperity  of  the  community  is  jeopardized 
by  reckless  financiering,  it  is  plain  that  the  people  should,  for 
their  own  protection,  take  out  of  the  hands  of  stockholders  the 
control  of  matters  with  which  they  are  incompetent  to  deal, 
and  by  the  enactment  of  laws  similar  to  those  which  regulate 
the  conduct  of  national  banks,  compel  directors  to  keep  at  all 
times  within  the  limits  of  conservatism. 

If  the  tremendous  decline  in  the  securities  of  the  largest 
industrial  corporation  in  the  world  —  a  decline  which  is  almost 
without  parallel,  and  which  has  inflicted  heavy  losses  upon  tens 


STEEL   CORPORATION    BOND   CONVERSION  255 

of  thousands  of  stockholders  —  shall  furnish  the  object-lesson 
necessary  to  bring  the  American  people  to  their  senses  upon 
this  question  of  the  necessity  of  rigid  federal  control  of  large 
corporations,  the  United  States  Steel  Corporation  will  not  have 
lived  in  vain. 

Edv^ard  Sherwood  Meade 
The  University  of  Pennsylvania 

THE  STEEL  CORPORATION'S  BOND  CONVERSION  :  A 
CORRECTION! 

In  the  preceding  article  Professor  Meade  gives  prominence 
to  the  recent  suit  of  Mr.  Hodge  against  the  Steel  Corporation, 
referring  to  it  as  if  it  might  have  been  a  "  strike  suit."  That 
the  defendants  in  this  suit  could  obtain  a  withdrawal  with- 
out pecuniary  outlay  was  well  known  to  them.  Mr.  Hodge's 
offer  of  withdrawal,  made  through  me  in  writing  at  an  early 
stage  of  the  litigation,  asked  simply  a  resubmission  of  the 
scheme  to  the  stockholders  with  full  information  as  to  its  main 
features,  or  else  its  modification  by  taking  from  the  Morgan 
syndicate  all  advantage  over  the  other  preferred  stockholders, 
giving  it  no  longer  option  to  subscribe  for  the  bonds,  no  greater 
time  to  pay  subscriptions,  and  no  commission  except  upon  the 
amount  which  the  syndicate  should  absolutely  bind  itself  to 
underwrite. 

The  point  upon  which  the  Vice-Chancellor  decided  the  case 
in  Mr.  Hodge's  favor,  if  sustained,  would  have  forced  a  resub- 
mission to  the  stockholders.  It  would  probably  then  have  been 
voted  down.  The  notice  upon  which  their  proxies  had  been 
obtained  had  been  so  drawn  as  to  give  the  impression  that  the 
whole  bond  issue  had  been  underwritten ;  and  the  syndicate's 
extraordinary  option  was  not  apparent.  The  stockholders  were 
indeed  informed  that  by  calling  at  the  Morgan  office  they  could 
secure  complete  copies  of  the  proposed  contract ;  but,  as  Pro- 
fessor Meade  truly  says,  nobody  called.  Each  assumed  that  he 
had  enough  information,  and  did  not  need  to  examine  legal  doc- 
uments.    The  most  interesting  question  to  the  pubUc  in  the 

1  From  the  Qiiarterly  Journal  of  Economics,  Vol.  XVIII,  1904,  p.  303. 


256  TRUSTS,    POOLS   AND   CORPORATIONS 

Hodge  suit  was  whether  this  notice  sufficiently  discharged  the 
duties  of  the  directors.  The  New  Jersey  court  held  that  it  did. 
Other  courts  have  set  up  a  much  higher  standard,  and  required 
of  interested  directors  the  fullest  disclosure.  The  standard  set 
by  the  state  which  has  fathered  so  large  a  proportion  of  the 
modern  "trusts"  has  had  no  small  influence  upon  public  confi- 
dence in  their  securities. 

Time  has  already  vindicated  Mr.  Hodge.  Public  sentiment 
recognizes  this,  and  has  forced  the  surrender  of  the  syndicate 
option.  Mr.  Schwab's  valuations  have  been  condemned  by  the 
market,  and  by  the. abandonment  of  dividends,  to  the  loss  of 
so  many  common  stockholders.  The  principle  of  his  valuation, 
that  in  bonding  a  company  it  should  be  capitalized  on  the  basis 
of  the  profits  of  a  year  of  prosperity,  instead  of  upon  the  avail- 
ability of  its  assets  in  a  period  of  depression,  was  never  indorsed 
by  conservative  men,  although  it  passed  muster  with  the  New 
Jersey  courts. 

The  fact  that  Mr.  Hodge  was  pubhcly  joined  as  complainant 
by  no  other  stockholder  of  record  was  not  due  to  lack  of  sympa- 
thy, —  of  that  he  received  a  plenty,  —  but  to  two  conditions 
which  are  among  those  that  most  contribute  to  the  success  of 
the  modern  "  trust "  financier.  Persons  with  large  interests  at 
stake  cannot  afford  to  join  openly,  because  they  are  afraid  that 
the  dominant  powers  in  Wall  street  may  take  revenge  by  attack- 
ing their  financial  credit  and  excluding  them  from  profitable 
enterprises.  Small  stockholders  have  not  suf^cient  interest 
pecuniarily  to  justify  the  annoyance  and  notoriety  and  the  news- 
paper abuse  to  which  they  would  be  subjected.  Even  necessary 
expert  testimony  is  difficult  and  expensive  to  obtain,  through 
fear  of  boycott ;  and  the  swiftness  with  which  the  directors'  plans 
are  carried  through  after  their  announcement  leaves  stockholders 
but  little  time  for  consultation  and  none  for  deliberate  action. 
It  is  only  when  the  plans  fail  for  other  causes,  as  in  the  ship- 
building case,  that  the  minority  have  time  for  investigation  or 

combined  action. 

Edward  B.  Whitney 

New  York 


STEEL   CORPORATION    BOND  CONVERSION  257 

THE   BOND-CONVERSION    PLAN    OF    1902-3^ 
Extent  of  Conversion  Operations 

At  the  time  the  conversion  plan  was  first  announced,  in  April, 
1902,  the  syndicate  members  deposited  with  the  syndicate 
managers  $80,000,000  preferred  stock,  and  it  appears  that  this 
stock  was  allowed  to  remain  in  the  hands  of  the  syndicate 
managers  during  the  time  the  plan  was  delayed  by  litigation. 
There  were  deposited  by  stockholders  outside  of  the  syndicate, 
either  at  the  time  the  plan  was  originally  announced  or  under 
the  offer  as  renewed  a  year  later,  $45,200,000  of  preferred 
stock.2  There  were  no  cash  subscriptions  to  new  bonds  on  the 
part  of  individual  stockholders  outside  of  the  syndicate  (except 
for  the  trifling  amount  of  $12,200),  since  the  bonds  at  the  out- 
set sold  (on  a  "  when-issued  "  basis)  shghtly  under  par  and  were 
selling  by  March,  1903,  when  the  plan  was  formally  put  in 
operation,  at  only  88.  The  preferred  stock  was  selling  in  April, 
1902,  when  the  plan  was  first  announced,  at  94;  by  the  time 
the  offer  was  renewed  the  price  had  dropped  to  about  85. 

Under  the  offer  as  renewed,  the  right  to  exchange  preferred 
stock  for  bonds,  so  far  as  shareholders  outside  of  the  syndicate 
were  concerned,  was  to  cease  on  May  16,  1903.  The  under- 
writing syndicate,  however,  could  make  such  exchange  until 
July  I,  1904;  in  other  words,  for  a  period  of  13.^  months  after 
this  privilege  was  terminated  with  respect  to  the  stockholders 
outside  the  syndicate.  It  is  true  that  the  individual  stock- 
holders had  been  given  for  a  limited  period  a  preferential  op- 
portunity to  exchange  their  preferred  stock  for  bonds.  That 
is  to  say,  had  every  holder  of  preferred  stock  outside  of  the 
syndicate  elected  to  exchange  40  per  cent  of  his  preferred  stock 
for  bonds,  then  the  syndicate  would  have  been  able  to  exchange 
only  a  part  (about  40  per  cent)  of  the  $80,000,000  which  it  had 
deposited  with  J.  P.  Morgan  &  Co.  As  just  shown,  however,  only 
about  $45,200,000  of  preferred  stock  was  deposited  by  the  share- 
holders outside  the  syndicate  up  to  May  16,  1903,  when  the  privi- 

1  From  U.  S.  Commissioner  of  Corporations,  Report  on  the  Steel  Industry,  I, 
July  I,  191 1,  p.  348-358. 

-  Annual  report  of  the  Steel  Corporation  for  1903. 


258  TRUSTS,    POOLS   AND   CORPORATIONS 

lege  was  terminated  so  far  as  these  stockholders  were  concerned. 
On  the  other  hand,  the  syndicate,  under  its  arrangement,  was  to 
be  allowed  to  continue  such  exchanges  up  to  July  i,  1904. 

The  exclusive  extension  of  this  privilege  to  the  underwriting 
syndicate  for  this  period  resulted  in  intense  dissatisfaction. 
This  was  greatly  aggravated  because  the  margin  between  the 
price  of  the  bonds  and  the  price  of  the  preferred  stock  con- 
tinued to  widen,  so  that  the  syndicate  was  able  to  make  a  large 
profit  by  buying  the  preferred  stock  in  the  market  and  imme- 
diately turning  it  into  bonds  worth  a  higher  price.  (As  shown 
elsewhere,  the  profit  on  this  operation  may  have  been  more  than 
off  set  by  a  loss  on  the  syndicate's  cash  subscription  to  $20,000,000 
bonds.)  In  October,  1903,  the  margin  between  the  price  of  the 
bonds  and  the  price  of  the  preferred  stock  was  about  12  points. 
In  November  it  widened  out  to  15  points,  the  preferred  stock 
seUing  below  50,  whereas  the  lowest  price  for  the  bonds  was 
65.  This  meant  that  the  syndicate,  which  had  the  exclusive  right 
to  continue  the  conversion,  could,  by  buying  preferred  stock  in 
the  open  market  and  immediately  exchanging  it  for  the  new 
bonds,  make  a  profit  of  $12  to  $15  on  every  share  thus  pur- 
chased and  exchanged.  The  total  amount  of  the  stock  pur- 
chased by  the  syndicate  appears  to  have  been  about  248,000 
shares. 

The  fact  that  the  privilege  of  such  exchange  was  confined  to 
the  underwriting  syndicate,  as  well  as  other  features  of  the  plan, 
aroused  widespread  disapproval.  As  a  result,  on  November  19, 
1903,  the  arrangement  was  abruptly  terminated. 

Results  of  Conversion  Plan 

Resjilts  to  the  Corporation.  —  The  conversion  plan,  it  will  be 
recalled,  purported  to  provide  for  the  exchange  of  $200,000,000 
of  7  per  cent  preferred  stock  into  a  like  amount  of  5  per  cent 
bonds,  thereby  substituting  an  interest  charge  of  $10,000,000 
for  dividend  requirements  of  $14,000,000,  and  also  for  the  sale 
of  $50,000,000  of  bonds  to  provide  cash,  which  was  apparently 
much  needed,  thereby  increasing  the  interest  charges  by 
$2,500,000.     One   result   of   this   plan,  therefore,  had  it   been 


STEEL   CORPORATION    BOND   CONVERSION  259 

carried  out  in  its  entirety,  would  have  been  the  substitution  of 
;^ 1 2,500,000  of  interest  for  ^14,000,000  of  dividends,  or  a  net 
saving  to  the  Corporation  of  $1,500,000,  On  the  conversion 
alone  the  saving  would  have  been  $4,000,000.  As  already  seen, 
however,  this  object  was  by  no  means  realized.  The  total 
amount  of  bonds  issued  under  this  conversion  plan  was  stated 
by  Chairman  Gary,  at  the  time  the  syndicate  agreement  was 
terminated,  as  follows  : 

$146,388,500  bonds  have  already  been  issued  in  exchange  for  stock  received  and 
canceled. 
3,611,500  remain  to  be  issued  in  exchange  for  preferred  stock  to  be  converted 

by  the  syndicate. 
2,902,000  bonds  sold  at  par  for  cash  and  paid  for  in  full  October  i  and  already 
issued. 
17,098,000  bonds  sold  at    par    for    cash    upon  which  25  per  cent   was  paid    to 
the  Corporation  October  i   and  which  will  be  issued  whenever  the 
remaining  75  per  cent  shall  be  called  foi?  and  paid. 

170,000,000  total  issue  outstanding. 

The  arrangement  was  further  described  in  the  second  annual 
report  of  the  Corporation  as  follows  : 

Up  to  December  31,  1903,  there  had  been  issued  and  were  out- 
standing United  States  Steel  Corporation  10-60  year  5  per  cent  sink- 
ing fund  gold  bonds,  dated  April  i,  1903,  for  the  aggregate  principal 
sum  of  $152,902,500.  These  bonds  were  issued  in  payment  for 
1,500,000  shares  of  preferred  stock  at  par,  as  well  as  in  consideration 
of  $7,177,100  cash  received  from  J.  P.  Morgan  &  Co.,  for  a  syndicate, 
being  part  of  $20,000,000  cash  receivable  under  the  contract  of  April 
I,  1902,  approved  by  the  stockholders  in  special  meeting  May  19, 
1902,  and  thereafter  sustained  by  the  courts.  Since  January  i,  1904, 
and  up  to  the  date  of  the  writing  of  this  report,  there  have  been  re- 
ceived from  J.  P.  Morgan  &  Co.  $3,822,900  additional  on  account  of 
the  aggregate  of  $20,000,000  cash  receivable  as  above,  and  there  have 
been  issued  additional  bonds  of  the  par  value  of  $5,o97,*5oo,  making 
at  this  date  (March  i,  1904)  a  total  issue  of  bonds  for  the  aggregate 
principal  sum  of  $158,000,000.  Thus  the  Corporation  has  received 
from  J.  P.  Morgan  &  Co.  for  the  syndicate  $11,000,000  in  cash  and 
has  delivered  $8,000,000  in  bonds,  leaving  $9,000,000  cash  to  be  re- 
ceived and  $12,000,000  bonds  to  be  delivered. 

The  Corporation  has  the  right  at  its  option  at  any  time  to  call  for 


26o  TRUSTS,   POOLS  AND   CORPORATIONS 

the  remaining  $9,000,000  cash,  but  in  order  to  avoid  the  unnecessary 
burden  of  interest  upon  bonds  issued  for  money  not  immediately 
needed,  arrangements  have  been  made  with  J.  P.  Morgan  &  Co. 
whereby,  until  otherwise  provided,  the  Corporation  will  not  be  re- 
quired to  call  the  remaining  $9,000,000  cash  or  to  deliver  bonds 
therefor  except  when  and  as  the  cash  shall  be  needed  by  the  Corpora- 
tion. Interest  on  these  bonds  begins  to  run  only  as  and  when  the 
Corporation  receives  cash  for  them.  Under  Article  Third  of  the  con- 
tract, Messrs.  J.  P.  Morgan  &  Co.,  representing  the  syndicate,  have 
received,  or  will  receive,  as  compensation  4  per  cent  upon  the  par  of 
$170,000,000  bonds,  for  which  there  have  been  sold  to  and  received 
by  the  Corporation  1,500,000  shares  of  preferred  stock  at  par,  be- 
sides the  $20,000,000  in  cash  received  or  receivable  as  above  stated. 

It  will  be  seen,  therefore,  that  the  plan  fell  far  short  of  ac- 
complishing what  it  was  designed  to  accomplish.  Instead  of 
providing  $50,000,000  new  cash  (or,  after  deducting  the  syn- 
dicate's commission  of  4  per  cent,  a  net  amount  of  $40,000,000) 
the  total  new  cash  raised  was  only  $13,200,000,  this  amount 
being  arrived  at  by  deducting  from  the  $20,000,000  cash  sub- 
scribed by  the  syndicate  the  4  per  cent  commission  on  the  total 
of  $170,000,000  of  new  bonds  issued,  or  $6,800,000.  Moreover, 
only  a  portion  of  this  cash  had  been  paid  in  to  the  Corporation 
at  the  end  of  December,  1903,  whereas,  according  to  the  circular 
announcing  the  conversion  plan  in  April,  1902,  $50,000,000  of 
cash  was  desired  in  the  immediate  future.  The  annual  dividend 
requirements  of  the  Corporation  had  been  reduced  by  $10,500,000 
through  the  exchange  of  the  $150,000,000  of  7  per  cent  pre- 
ferred stock  for  the  5  per  cent  bonds,  but  interest  charges  had 
been  increased  $8,500,000  by  reason  of  the  issuance  of  a  corre- 
sponding amount  of  5  per  cent  bonds  plus  $20,000,000  additional 
bonds  sold  for  cash.  There  was,  therefore,  a  net  reduction  in 
the  combirked  charges  of  $2,000,000  per  annum.  This  reduc- 
tion, however,  had  been  accomplished  only  by  substituting  a 
bonded  debt  for  a  stock  liability,  and  at  an  initial  cash  expendi- 
ture of  $6,800,000  for  commissions. 

Res7(lts  to  the  Syndicate.  —  The  results  of  the  bond-conversion 
plan  to  the  underwriting  syndicate  can  only  be  estimated,  since 
it  is  not  known  what  the  stock  deposited  by  syndicate  members 


STEEL   CORPORATION    BOND   CONVERSION  261 

cost  them,  or  what  profit  was  made  on  the  purchase  of  preferred 
stock  in  the  open  market  by  the  syndicate  for  exttlange  into 
bonds. 

It  will  be  recalled  that  the  syndicate  originally  deposited 
^80,000,000  of  preferred  stock  and  the  outside  stockholders 
^45,200,000,  leaving  $24,800,000  to  be  purchased  in  the  open 
market  by  the  syndicate  (the  total  amount  of  preferred  stock 
exchanged  being  $150,000,000). 

The  preferred  stock,  at  the  time  it  was  originally  deposited  by 
the  syndicate  members,  was  worth,  as  already  stated,  about  94. 
The  5  per  cent  bonds,  at  the  time  the  syndicate  was  finally 
wound  up  in  May,  1904,  were  quoted  at  about  73.  On  this 
basis  alone  (which  is  not  wholly  conclusive),  there  was  a  loss  of 
21  points  on  each  share  of  preferred  stock  exchanged  by  the 
syndicate,  or  $16,800,000  in  all.  Against  this,  however,  must 
be  placed  the  syndicate's  commission  of  $6,800,000,  and  the 
profits  which  it  made  on  the  purchase  of  preferred  stock  in  the 
open  market  for  exchange  into  bonds ;  deductions  would  then 
have  to  be  made  for  certain  expenses  of  the  syndicate.  The 
amount  of  the  profit  made  on  such  purchases  of  preferred  stock 
in  the  open  market  is  not  definitely  known.  Just  before  the 
conversion  arrangement  was  terminated,  in  the  latter  part  of 
November,  1903,  there  was  a  possible  profit  of  nearly  15  points 
on  such  conversion  operations.  As  shown  later,  very  heavy 
purchases  of  the  preferred  stock  were  made  in  the  open  market 
at  just  about  this  time,  and  it  is  reasonable  to  assume  that  a  con- 
siderable part  of  such  purchases  were  for  the  account  of  the 
syndicate,  because  of  the  large  profit  possible  on  such  operations. 
An  allowance  of  $15  per  share  as  the  average  profit  on  such 
open-market  conversion  operations  would,  however,  probably  be 
too  high.  Assuming  that  the  profit  may  have  averaged  as 
much  as  $10  per  share  for  the  preferred  stock  exchanged,  the 
syndicate's  profit  on  this  part  of  the  transaction  would  have 
been,  roughly,  $2,500,000,  in  addition  to  which  there  would  have 
been  some  interest  receipts  ;  but,  on  the  other  hand,  there  would 
have  to  be  deducted  the  expenses  of  the  syndicate.  Assuming 
that  the  net  profit  on  the  preferred  stock  purchased  for  exchange 
into  bonds  was  only  $2,000,000,  the  indicated  loss  of  $16,800,000 


262  TRUSTS,    POOLS   AND    CORPORATIONS 

above  referred  to  would  have  been  reduced,  after  also  taking 
account  of  the  $6,800,000  commission,  to  $8,000,000.  It  may 
be  noted  that  some  estimates  of  the  syndicate's  loss  published  in 
financial  journals  about  this  time  ranged  in  the  neighborhood  of 
this  figure. 

It  is,  of  course,  somewhat  arbitrary  to  calculate  the  results  to 
the  syndicate  on  the  basis  of  the  value  of  the  bonds  on  the  day 
the  syndicate  agreement  was  terminated.  Some  of  the  bonds 
had  been  delivered  to  syndicate  members  prior  to  that  date, 
while  the  value  of  those  received  at  that  time  might  perhaps  be 
better  expressed  by  taking  the  average  market  price  over  a  con- 
siderable period  of  time.  Thus  the  average  price  of  these  bonds 
during  the  remainder  of  the  calendar  year  1904  was  approxi- 
mately 81,  or  8  points  above  the  price  used  in  the  foregoing 
calculation.  If  the  bonds  had  been  disposed  of  at  such  an 
average  figure,  the  indicated  loss  would  of  course,  be  correspond- 
ingly reduced. 

Any  calculations  of  the  results  to  the  syndicate,  however,  are 
necessarily  somewhat  inconclusive.  The  conversion  operations 
were  accompanied  by  pronounced  depression  in  the  steel  indus- 
try and  there  can  be  little  doubt  that  the  preferred  stock  would 
have  declined  heavily  even  had  the  conversion  plan  never  been 
undertaken.  Viewed  from  this  standpoint,  it  might  be  argued 
that  the  syndicate  members  (and  individual  stockholders  as  well), 
in  proportion  as  they  exchanged  preferred  stock  for  a  bond 
worth  from  10  to  15  points  more,  reduced  a  loss  which  they 
might  otherwise  have  suffered.  On  the  other  hand,  in  recent 
years  the  preferred  stock  of  the  Steel  Corporation  has  sold  well 
above  these  bonds  (both  issues,  moreover,  having  sold  for  a  long 
time  well  above  par),  so  that  viewed  from  this  point  it  might  be 
argued  that  the  stockholders  and  syndicate  members  who  ex- 
changed their  preferred  stock  had  lost  a  possible  profit  in  this 
operation.  Against  any  sacrifice  of  future  profit  which  might 
have  been  made  by  retaining  the  7  per  cent  preferred  stock, 
however,  those  who  exchanged  that  issue  at  all  times  enjoyed 
the  advantages  afforded  by  a  security  which  preceded  that  issue, 
while,  moreover,  the  bonds  for  a  considerable  time  sold  at  higher 
prices  than  the  preferred  stock. 


STEEL   CORPORATION    BOND    CONVERSION  263 

General  Criticism  of  the  Conversion  Flan 

While  the  courts  of  final  resort  decided  every  suit  brought 
against  the  conversion  plan  in  favor  of  the  United  States  Steel 
Corporation,  their  decisions  really  had  almost  nothing  to  do  with 
the  merits  of  the  plan  itself.  The  courts  passed  almost  exclu- 
sively on  the  legal  rights  of  the  Corporation.  On  the  question 
of  the  propriety  of  the  plan  the  court  simply  held  that,  in  the 
absence  of  fraud,  they  could  not  go  back  of  the  action  of  the 
directors  of  the  Corporation.  They  held  that  there  was  no  evi- 
dence of  fraud.  This,  however,  is  aside  from  the  question  of 
the  advisability  or  wisdom  of  the  plan. 

The  wisdom  of  substituting  a  bond  issue  for  a  portion  of  the 
preferred  stock  may  be  left  to  individual  opinion.  The  ques- 
tion whether  the  company  should  have  postponed  the  payment 
of  dividends  on  the  common  stock  and  thus  have  avoided  issuing 
bonds  for  cash  may  likewise  be  passed  over  at  this  late  day,  and 
particularly  since  these  are  matters  which  concern  the  stock- 
holders rather  than  the  general  public.  Some  features  of  the 
plan,  however,  are  of  general  interest  both  as  bearing  upon  the 
organization  and  financing  of  corporations,  and  also  because  they 
had  a  direct  bearing  through  the  stock  market  on  the  security 
market  in  general,  and  thus  tended  directly  to  affect  the  general 
public.  Particular  mention  may  be  made  of  the  arrangement 
with  the  underwriting  syndicate  and  its  compensation.  It  will 
be  recalled  that  whereas  the  holders  of  the  preferred  stock  out- 
side the  syndicate  were  permitted  to  deposit  preferred  stock  in 
exchange  for  bonds  only  during  the  period  from  March  16  to 
May  16,  1903,  the  syndicate  was,  under  the  terms  of  the  con- 
tract, as  renewed,  permitted  to  make  such  exchange  up  to  July 
I,  1904.  After  the  offer  had  been  terminated  with  respect  to 
the  shareholders  outside  the  syndicate,  in  view  of  the  fact  that 
such  shareholders  took  advantage  of  the  offer  only  to  a  Hmited 
extent,  the  dechne  in  the  market  price  of  the  preferred  stock 
worked  to  the  advantage  of  the  syndicate,  since  it  could  buy 
that  stock  and  convert  it  into  bonds  at  a  higher  price.  While 
the  bonds  themselves  declined  greatly  in  value  the  preferred 
stock  fell  so  much  faster  that  there  was  a  large  profit  for  the 


264  TRUSTS,    POOLS   AND   CORPORATIONS 

syndicate  (with  respect  to  this  part  of  the  arrangement)  in  thus 
purchasing  preferred  stock  and  exchanging  it  into  bonds.  As 
already  shown,  when  the  plan  was  first  announced,  in  April, 
1902,  the  new  bonds  were  quoted  at  only  a  fraction  under  par, 
the  preferred  stock  at  94.  By  the  time  the  plan  was  actually 
put  in  operation,  in  March,  1903,  the  preferred  stock  had 
dropped  to  about  86.  The  bonds,  however,  had  fallen  to  about 
87,  so  that  there  was  only  a  small  margin  between  them.  The 
relationship  of  the  two  prices  was  substantially  maintained  up 
to  May  16,  1903,  when  the  subscription  privilege  of  preferred 
stockholders  outside  the  syndicate  was  terminated,  both  the 
stock  and  the  bonds  being  quoted  on  that  date  at  about  83.  By 
July  I,  however,  the  stock  had  fallen  to  81,  the  bonds  remaining 
unchanged  at  about  83,  thus  showing  a  difference  of  about  2 
points.  By  the  first  of  October  this  margin  had  increased  to 
about  10  points,  and  by  the  end  of  the  month  to  over  12  points, 
while  by  the  middle  of  November,  or  just  before  the  contract 
with  the  syndicate  was  terminated,  it  had  widened  out  to  about  15 
points.  During  the  entire  interval  from  May  16,  1903,  to  Novem- 
ber 19,  1903,  on  which  date  the  arrangement  was  terminated, 
the  syndicate  had  the  exclusive  right  of  conversion.  Obviously 
there  was  a  heavy  profit  in  thus  purchasing  preferred  stock  at 
from  10  to  15  points  below  the  price  of  the  bonds  and  making 
the  conversion.  It  has  already  been  shown  that  the  syndicate 
apparently  purchased  something  like  248,000  shares  of  preferred 
stock  in  addition  to  the  amount  originally  deposited  by  it.  Ap- 
parently the  great  bulk  of  this  stock  was  purchased  during  the 
interval  when  the  margin  between  the  price  of  the  bonds  and 
the  price  of  the  stock  was  abnormally  wide.  Very  convincing 
evidence  to  this  effect  is  furnished  by  the  fact  that  on  October 
22,  1903,  the  United  States  Steel  Corporation,  in  making  appli- 
cation to  the  New  York  Stock  Exchange  to  have  these  bonds  listed 
on  the  exchange,  stated  that  there  had  been  issued  up  to  that  time 
^133.295,500  of  the  new  bonds,  of  which  amount  $130,411,000 
had  been  issued  in  exchange  for  preferred  stock  to  be  retired 
(the  balance  having  been  sold  for  cash  to  the  syndicate).  As 
above  shown,  when  the  syndicate  agreement  was  terminated  by 
the  Corporation,  the  amount  of  preferred  stock  exchanged  or 


STEEL   CORPORATION    BOND   CONVERSION  265 

which  could  be  exchans^cd  was  $150,000,000.  Therefore,  the 
evidence  is  very  strong  that  during  this  interval  between  October 
22,  1903,  and  November  19,  1903,  approximately  ^20,000,000 
worth  of  preferred  stock,  or  200,000  shares,  were  purchased  in 
the  open  market  by  the  syndicate  for  exchange.  During  this 
interval  there  were  very  heavy  transactions  in  the  preferred 
stock,  the  total  for  the  four  weeks  ended  October  19  exceeding 
2,000,000  shares,  while  the  margin  between  the  preferred  stock 
and  the  bonds  ranged  generally  from  12  to  15  points,  occasion- 
ally being  somewhat  greater. 

As  already  stated  the  privilege  of  the  syndicate  to  make  such 
conversion  operations  was  terminated  on  November  19,  1903. 
The  following  statement  was  given  out  by  E.  H.  Gary,  chairman 
of  the  Corporation : 

At  a  meeting  of  the  finance  committee  of  the  United  States  Steel 
Corporation  held  yesterday  it  was  (by  unanimous  vote)  decided  to  sug- 
gest to  Messrs.  J.  P.  Morgan  &  Co.  that  the  syndicate  contract  for  the 
conversion  of  preferred  stock  into  second-mortgage  5  per  cent  bonds 
should  be  canceled  and  terminated  beyond  the  amount  of  $  150,000,000, 
which  figure  has  very  nearly  been  reached. 

Messrs.  J.  P.  Morgan  &  Co.  immediately  acceded  to  the  request  of 
the  finance  committee  and  no  further  exchanges  will  be  made  for 
account  of  the  syndicate  beyond  the  amount  stated. 

It  was  reported  that  this  sudden  termination  of  the  agreement 
was  prompted  by  the  threat  of  injunction  proceedings  against 
the  Corporation.  However  that  may  have  been,  the  vigorous 
condemnation  of  the  plan  by  the  press  was  involving  the  Corpo- 
ration in  exceedingly  unpleasant  notoriety,  and  there  can  be 
little  doubt  that  the  abandonment  of  the  arrangement  was  in 
response  to  this  disapproval.     (See  pp.  350-35I-) 

While  the  evidence,  therefore,  indicates  that  the  syndicate 
purchased  a  very  large  quantity  of  preferred  stock  during  the 
period  when  it  was  selUng  at  a  wide  margin  under  the  price  of 
the  bonds,  this  in  itself  does  not  show  that  the  syndicate  was 
directly  responsible  for  the  pronounced  depression  of  the  stock. 
Such  charges  would,  of  course,  be  almost  impossible  of  proof. 
It  is,  however,  worth  noting  that  the  suspicion  was  very  widely 


266  TRUSTS,    POOLS   AND   CORPORATIONS 

entertained  in  Wall  Street  at  the  time  that  the  syndicate  was  not 
merely  taking  advantage  of  a  pronounced  decline  in  the  pre- 
ferred stock,  but  that  it  had  actively  assisted  in  bringing  about 
this  decline.  The  mere  fact  that  there  was  a  special  induce- 
ment to  indulge  in  such  manipulation  and  that  the  syndicate 
would  be  the  sole  beneficiary  at  the  expense  of  the  remaining 
stockholders  is  alone  a  very  telling  criticism  of  this  feature  of 
the  plan. 

Complaint  was  also  made  that  the  4  per  cent  commission  to 
the  syndicate  was  excessive.  Opinions  on  this  question  depend 
chiefly  on  one's  views  as  to  the  general  merit  of  the  plan  of  ex- 
changing preferred  stock  into  bonds.  If  the  conclusion  be 
reached  that  the  substitution  of  $150,000,000  of  5  per  cent 
bonds  for  a  like  amount  of  7  per  cent  preferred  stock  was  in 
itself  desirable  and  advantageous  to  the  Corporation,  then  the 
payment  of  $6,800,000  in  the  form  of  a  4  per  cent  commission 
on  this  portion  of  the  bond  issue  could  perhaps  be  defended. 
If,  however,  such  substitution  of  bonds  for  stock  is  regarded  as 
inadvisable,  then  the  payment  of  the  4  per  cent  commission 
for  effecting  such  exchange  becomes  open  to  objection.  It 
amounted,  on  this  assumption,  to  the  payment  by  the  Corpora- 
tion of  $6,800,000  to  the  syndicate  for  raising  $20,000,000  of 
cash ;  in  other  words,  a  commission  of  34  per  cent.  Viewed  in 
this  light  alone,  it  is  impossible  to  avoid  the  conclusion  that  the 
commission  was  grossly  excessive. 

Without  attempting  to  pass  on  this  feature  of  the  plan,  it 
seems  clear  that  the  exclusive  privilege  allowed  the  syndicate  of 
converting  preferred  stock  into  bonds  was  undesirable  and  un- 
justifiable. Certainly  for  the  time  being  it  seriously  hurt  the 
prestige  of  the  Corporation. 

Reasons  for  the  Conversion  Plan.  — There  has  been  a  great 
deal  of  discussion  as  to  why  the  directors  of  the  Steel  Corpora- 
tion decided  upon  this  conversion  plan.  One  of  the  most 
probable  reasons  for  its  adoption  is  that  the  financial  interests 
identified  with  the  Corporation  found  that  its  enormous  capitali- 
zation acted  as  a  wet  blanket  upon  the  stock  market  at  all  times 
and,  furthermore,  that  it  constituted  a  very  serious  potential 
menace  in  the  event  of  a  sudden  panic.     Although  the  preferred 


STEEL   CORPORATION    BOND   CONVERSION  267 

stock  of  the  Corporation  was  paying  7  per  cent  dividends,  it  was 
at  that  time  regarded  by  conservative  investors  as  distinctly  a 
speculative  security.  Indeed,  during  the  depression  in  the  iron 
and  steel  industry  in  the  winter  of  1903-1904,  when  the  dividend 
on  the  common  stock  was  first  cut  in  two,  and  later  suspended 
altogether,  there  were  very  grave  fears  that  the  Corporation 
would  not  be  able  to  maintain  dividends  on  even  the  preferred 
stock.  This  feeling  among  conservative  investors  undoubtedly 
prevented  a  rapid  distribution  of  the  preferred  issue  by  banking 
interests  who  were  carrying  large  amounts  of  this  stock.  A 
5  per  cent  bond,  on  the  other  hand,  might  appeal  more  strongly 
to  the  investing  class,  and  thus  might  afford  a  means  for  relieving 
the  stock  market  of  the  pressure  of  the  enormous  capitalization 
of  the  Corporation  to  that  extent.  That  is  to  say,  if  a  large 
amount  of  the  preferred  stock  of  the  Corporation  then  "  on  the 
market "  could  be  withdrawn,  exchanged  into  bonds,  and  placed 
with  investors  who  would  be  disposed  to  hold  the  latter  without 
much  regard  to  temporary  fluctuations  in  market  conditions,  the 
financial  operations  of  banking  interests  in  other  directions  would 
be  faciUtated  to  this  extent.  A  special  point  in  this  connection 
is  that  some  of  the  large  insurance  corporations,  and  other  insti- 
tutions of  a  similar  character,  might  naturally  be  more  ready  to 
purchase  a  bond  than  preferred  stock.  There  seems  to  be  little 
doubt  that  this  was  a  primary  motive  underlying  the  adoption 
of  the  conversion  plan. 

Another  explanation  sometimes  advanced  is  that  the  plan  was 
largely  designed  to  increase  the  value  of  the  common  stock  by 
reducing  the  prior  charges.  Some  of  the  leading  interests  in 
the  Steel  Corporation  claimed  to  be  large  owners  of  the  common 
stock.  It  is  difficult  to  believe,  however,  that  this  could  have 
been  a  very  important  consideration  in  the  minds  of  the  directors, 
since  the  substitution  of  a  bonded  debt  for  the  preferred  stock 
can  hardly  be  regarded  as  likely  to  improve  the  standing  of  the 
common  stock  with  investors  generally.  It  is  true  that  the  new 
bonds  contained  a  provision  to  the  effect  that  foreclosure  pro- 
ceedings could  not  be  instituted  under  them  until  there  had  been 
a  failure  for  a  consecutive  period  of  two  years  to  pay  interest. 
It   is    also   true   that    the   conversion    operations    reduced    the 


268  TRUSTS,   POOLS   AND   CORPORATIONS 

charges  coming  ahead  of  the  common  stock.  However,  the 
influence  of  a  bond  issue  is  ordinarily  more  adverse  to  the  com- 
mon stock  than  that  of  an  issue  of  preferred  stock,  and  it  hardly 
seems  probable  that  the  possibility  of  enhancing  the  value  of  the 
common  stock  was  an  important  factor  in  bringing  about  this 
conversion  plan. 

Still  another  explanation  offered  for  this  plan  was  that  it  was 
a  deliberate  scheme  to  enable  the  underwriting  syndicate  to 
"milk"  the  Corporation.  While  the  anticipated  profit  of  the 
syndicate  undoubtedly  was  an  important  consideration,  and 
while,  as  already  pointed  out,  such  underwriting  profits  were  a 
very  conspicuous  feature  of  the  consolidation  movement  in  the 
steel  industry  throughout,  it  hardly  seems  reasonable  to  assume 
that  the  primary  object  of  the  directors  of  the  Corporation  in 
adopting  this  conversion  plan  was  to  secure  a  large  profit  for  an 
underwriting  syndicate  of  which  only  a  part  of  them  were  mem- 
bers. While  open  to  several  serious  objections,  it  seems  more 
probable  that  the  syndicate  arrangement  was  an  incident  of  the 
plan  and  not  its  chief  object. 


viri 

THE    TOBACCO    MONOPOLY^ 
HISTORY   OF   THE   TOBACCO   COMBINATION 

THE  Tobacco  combination  has  as  its  center  the  American 
Tobacco  Company.  This  company  controls  three  great 
subsidiary  combinations  —  the  American  Snuff  Company,  the 
American  Cigar  Company,  and  the  British-American  Tobacco 
Company.  The  American  Tobacco  Company  and  the  other  three 
combinations  each  control  a  large  number  of  subsidiary  companies. 
The  number  of  companies  in  the  combination  doing  business  in 
the  United  States,  Porto  Rico,  and  Cuba  is  86,  besides  a  con- 
siderable number  operating  only  in  foreign  countries. 

The  Tobacco  combination  dominates  the  tobacco  industry  of 
the  United  States.  With  the  exception  of  cigars,  its  proportion 
of  the  country's  output  of  manufactured  tobacco  products  is  sub- 
stantially four  fifths,  giving  it  a  large  degree  of  monopoly  power. 

The  magnitude  of  the  combination  is  further  shown  by  its 
enormous  capitalization.  The  said  86  companies  have  an  aggre- 
gate capitalization,  including  bonds,  of  $450,395,890,  A  con- 
siderable part  of  this,  however,  represents  duplication  through 
intercompany  ownership  of  securities.  The  net  amount  of  the 
stock  and  bonds  of  the  companies  in  the  hands  of  the  public 
(including  the  directors  and  all  holders  except  the  companies 
themselves),  however,  is  no  less  than  $316,346,821. 

The  American  Tobacco  Company  and  its  Cigarette  Monop- 
oly, 1890  TO  1895 

The  history  of  the  combination  begins  with  the  organization 
of  the  American  Tobacco  Company  in  1890.  This  was  a  com- 
bination of  the  five  principal  manufacturers  of  cigarettes,  and 

1  From  Report  U.  S.  Commissioner  of  Corporations,  vol.  I,  Feb.  25,  1909,  pp. 
1-41.  Footnotes  and  subheadings  are  omitted  without  specific  indication.  Compare 
also  the  Supreme  Court  decision  of  19 11  in  Chapter  XVII,  in/ra. 

269 


270  TRUSTS,    POOLS   AND   CORPORATIONS 

its  business  at  first  was  confined  substantially  to  cigarette  manu- 
facture. The  company  started  with  a  capital  of  $10,000,000  of 
preferred  stock  and  $15,000,000  of  common  stock  —  an  amount 
vastly  in  excess  of  its  tangible  assets,  which  were  $5,000,000 
(including  $1,825,000  in  the  form  of  notes  of  the  individual 
stockholders).  James  B.  Duke  was  made  president,  and  from 
that  time  to  this  he  has  been  president  of  the  leading  companies 
in  the  combination  and  has  largely  directed  its.  policy. 

The  American  Tobacco  Company  at  its  inception  secured  con- 
trol of  over  90  per  cent  of  the  cigarette  business  of  the  country. 
It  sought  to  maintain  this  dominant  position  partly  by  making 
agreements  for  the  exclusive  use  of  what  were  considered  the 
best  cigarette  machines;  the  most  important  of  these  agree- 
ments, however,  was  terminated  in   1895.     During  this  period, 

1890  to  1895,  the  average  profits  of  the  company  were  very 
large,  exceeding  four  million  dollars  annually. 

The  Plug-tobacco  War,  1894  to  1897 

The  American  Tobacco  Company  early  began  to  extend  its 
domination  to  cover  other  branches  of  the  tobacco  industry.     In 

1 89 1  the  authorized  capital  was  increased  to  $35,000,000.  Of 
this  increase  $6,000,000  was  common  and  $4,000,000  preferred 
stock.  In  this  year  the  company  bought  two  important  concerns 
manufacturing  smoking  tobacco  and  snuff,  another  manufactur- 
ing plug  chewing  tobacco,  and  a  fourth  which  was  the  principal 
manufacturer  of  cheroots  in  the  United  States.  During  the 
period  from  1894  to  1897  it  developed  its  plug-tobacco  business 
with  such  a  degree  of  success  that  ultimately  its  leading  compet- 
itors in  that  branch  were  forced  into  combination  with  itself. 

In  pursuit  of  its  policy  of  expansion  the  American  Tobacco 
Company,  particularly  after  1894,  sold  plug  tobacco  at  greatly 
reduced  prices.  Its  leading  fighting  brand  bore  the  appropriate 
name  of  "  Battle  Ax."  At  one  time  this  brand  was  sold  to 
jobbers  as  low  as  13  cents  per  pound,  which,  considering  the 
revenue  tax,  was  below  the  cost  of  production.  The  company's 
immense  profits  from  its  cigarette  business  furnished  the  means 
for  conducting  this  expensive  competitive    struggle,   in   which 


i 


THE   TOBACCO    MONOPOLY  271 

several  millions  were  sacrificed.  The  American  Tobacco  Com- 
pany's plug  business  increased  swiftly,  and  by  1897  it  had  more 
than  one  fifth  of  the  total  plug  output  of  the  country.  To  en- 
able the  company  to  fill  its  orders,  an  additional  plug  plant  was 
purchased  in  1895,  and  another  erected. 

The  Plug-tobacco  Combination,   i  898-1 899 

By  1898  a  number  of  the  leading  independent  manufacturers 
of  plug  tobacco  had  wearied  of  the  fierce  competitive  struggle 
and  were  prepared  to  consider  propositions  for  combining  their 
interests  with  those  of  the  American  Tobacco  Company.  The 
first  negotiations,  early  in  1898,  were,  however,  unsuccessful, 
partly  by  reason  of  the  increase  in  taxes  during  the  Spanish- 
American  war,  which  appeared  to  the  financiers  who  were  pro- 
moting the  enterprise  likely  to  interfere  with  its  profitableness. 
Shortly  thereafter  the  American  Tobacco  Company  bought  out- 
right two  important  plug-manufacturing  concerns  —  the  Brown 
Brothers  and  Drummond  tobacco  companies,  of  St.  Louis. 
This  greatly  strengthened  the  position  of  the  American,  and  it 
apparently  determined  to  renew  the  vigorous  competition  of  the 
preceding  years  against  its  powerful,  rivals.  For  this  purpose 
the  price  of  "  Horseshoe,"  the  leading  brand  of  the  Drummond 
concern,  was  sharply  reduced. 

Before  this  new  competitive  fight  had  become  very  active, 
however,  further  negotiations  for  combination  began.  The  plug 
combination,  known  as  the  Continental  Tobacco  Company,  was 
organized  on  December  10,  1898.  It  took  over  the  plug  busi- 
ness of  the  American  Tobacco  Company,  including  the  Brown 
and  Drummond  concerns,  and  also  that  of  six  leading  competi- 
tors, while  a  few  months  later  the  most  important  competitor  of 
all,  the  Liggett  &  Myers  Tobacco  Company,  was  also  brought 
into  the  combination.  Several  of  the  concerns  acquired  had 
also  a  large  business  in  smoking  tobacco.  Although  the  Ameri- 
can Tobacco  Company  did  not  at  that  time  own  a  majority  of 
the  stock  of  the  Continental  Tobacco  Company,  the  men  con- 
nected with  the  American  were,  from  the  very  first,  dominant 
in  the  Continental's  directorate. 


2/2  TRUSTS,    POOLS   AND   CORPORATIONS 

The  Continental  Tobacco  Company  issued  at  the  time  of  its 
organization  $62,290,700  of  stock.  This  amount  was  still  fur- 
ther increased  in  April,  1899,  by  reason  of  the  acquisition  of 
the  Liggett  &  Myers  concern.  The  total  issue  then  became 
$48,844,600  of  preferred  stock  and  $48,846,100  of  common 
stock,  or  $97,690,700  altogether,  an  amount  which  thereafter 
remained  unchanged.  The  company  was  greatly  overcapital- 
ized, the  common  stock  being  issued  wholly  as  a  bonus.  Much 
the  greater  part  of  both  classes  of  stock  was  given  directly  in 
exchange  for  the  property  and  business  acquired.  The  com- 
pany issued  $15,137,100  of  preferred  and  a  like  amount  of  com- 
mon stock  for  the  property  and  business  turned  over  by  the 
American  Tobacco  Company  ;  $17,500,000  each  of  preferred  and 
common  for  $5,000,000  in  cash  and  the  property  and  business 
of  the  Liggett  &  Myers  Tobacco  Company;  and  $13,456,100  in 
preferred  and  $16,207,500  in  common  stock  for  the  property  and 
business  of  other  concerns.  From  the  beginning  the  American 
Tobacco  Company  had  complete  control  over  the  new  combina- 
tion. 

Entrance  of  Financiers  into  the  Management 

The  acquisition  of  the  Liggett  &  Myers  Tobacco  Company 
by  the  Continental,  just  referred  to,  was  part  of  a  series  of  trans- 
actions which  had  a  most  important  influence  upon  the  person- 
nel of  both  the  American  and  Continental  tobacco  companies. 
During  1898  a  group  of  powerful  financial  interests,  including 
Thomas  F.  Ryan,  P.  A.  B.  Widener,  A.  N.  Brady,  W.  C.  Whit- 
ney, and  Thomas  Dolan,  bought  up  the  Blackwell's  Durham 
Tobacco  Company,  an  important  manufacturer  of  smoking 
tobacco,  and  the  National  Cigarette  and  Tobacco  Company, 
combining  them  under  the  name  of  the  Union  Tobacco  Com- 
pany. They  also  secured  an  option  upon  a  controlling  portion 
of  the  stock  of  the  Liggett  &  Myers  Tobacco  Company,  con- 
trol of  which  of  course  was  very  important  to  the  new  plug 
combination.  Mr.  Duke  and  his  associates  in  the  American 
and  Continental  companies  realized  the  seriousness  of  the  pos- 
sible competition  of  the  Union  Tobacco  Company  interests, 
backed  by  these  wealthy  financiers.    They  therefore  entered  into 


THE   TOBACCO    MONOPOLY  273 

negotiations  with  these  financiers  and  bought  out  the  properties 
they  controlled  at  a  high  price.  In  the  spring  of  iSg^the  assets 
of  the  Union  Tobacco  Company  proper  were  taken  over  by  the 
American  Tobacco  Company  in  exchange  for  $12,500,000  com- 
mon stock.  Shortly  afterwards,  through  another  syndicate, 
composed  in  part  of  the  men  above  mentioned,  but  also  including 
J.  B.  Duke,  O.  H.  Payne,  and  H.  D.  Terrell,  the  Liggett  &  Myers 
Tobacco  Company  assets,  together  with  $5,000,000  in  cash,  were 
transferred  to  the  Continental  Tobacco  Company  in  exchange  for 
$17,500,000  of  its  common  stock  and  $17,500,000  of  preferred 
stock. 

These  transactions  were  important,  not  only  because  they  still 
further  inflated  the  capitalization  of  the  two  companies,  but  be- 
cause they  resulted  in  giving  a  very  large  stock  interest  in  both  to 
the  financiers  who  had  organized  the  Union  Tobacco  Company. 
Most  of  these  men  shortly  thereafter  entered  the  directorate  of 
either  the  American  or  Continental  company,  or  both,  and  from 
that  time  on  have  been  important  factors  in  the  control  of  the 
entire  Tobacco  combination. 

Already  before  this  time  there  had  been  marked  changes  in 
the  directorate  of  the  American  Tobacco  Company.  The  cam- 
paign for  control  of  a  larger  part  of  the  tobacco  industry,  which 
has  just  been  recounted,  had  not  been  favored  by  most  of  the 
leaders  in  the  original  cigarette  combination.  Consequently, 
Ginter,  Kinney,  Kimball,  and  Emery  (owner  of  Goodwin  &  Co.) 
had  practically  disposed  of  their  interests  in  the  American  To- 
bacco Company  by  the  spring  of  1898.  Indeed,  none  of  them 
was  a  director  in  that  company  after  the  spring  meeting  of  1897. 

This  defection  of  most  of  the  large  stockholders  among  those 
who  had  organized  the  original  combination  found  other  men, 
possessed  of  large  capital  but  without  previous  experience  in 
tobacco  manufacture,  ready  to  avail  themselves  of  the  oppor- 
tunity offered.  During  the  latter  part  of  1897  and  early  in 
1898  Oliver  H.  Payne  and  H.  L.  Terrell  invested  freely  in  stocks 
of  the  American  Tobacco  Company  and  were  elected  directors. 
At  about  this  time  Moore  &  Schley,  New  York  bankers  and 
brokers,  also  established  close  relations  with  the  combination. 
They  financed  the  organization  of  the  Continental  Tobacco  Com- 


274  TRUSTS,    POOLS   AND   CORPORATIONS 

pany.  These  new  men,  together  with  those  who  entered  the  man- 
agement as  the  result  of  the  Union  Tobacco  Company  transaction, 
have  had  a  powerful  influence  in  the  subsequent  expansion  policy 
of  the  combination,  both  by  furnishing  capital  and  in  other  ways. 
At  the  time  of  the  purchase  of  the  Union  Tobacco  Company 
the  American  Tobacco  Company  paid,  out  of  its  accumulated 
surplus  and  the  profits  of  the  sale  of  its  plug  business  to  the 
Continental,  a  stock  dividend  of  lOO  per  cent,  or  $21,000,000,  to  its 
common-stock  holders.  This,  with  the  stock  issued  for  the  Union, 
added  $33,500,000  to  the  company's  capital  stock  and  almost 
doubled  the  capitalization  already  existing.  From  this  time  on 
until  1904  the  capitalization  of  the  American  Tobacco  Company 
consisted  of  $54,500,000  of  common  stock  and  $14,000,000  of  pre- 
ferred stock. 

The  Snuff  Combination 

Within  a  short  time  after  the  organization  of  the  Continental 
Tobacco  Company  the  combined  interests  obtained  control  of 
practically  all  the  leading  snuff  concerns  of  the  country.  Ever 
since  1891  the  American  Tobacco  Company  had  had  a  small 
snuff  business.  The  Continental  had  acquired  the  extensive 
snuff  business  of  the  P.  Lorillard  Company,  and  in  1899  the 
American  Tobacco  Company  acquired  two  or  three  additional 
snuff  concerns.  The  two  companies  together  had  at  the  begin- 
ning of  1900  substantially  one  third  of  the  snuff  business  of  the 
country.  About  two  years  before  this,  however,  a  combination 
of  the  important  strong  Scotch  snuff-manufacturing  concerns  of 
the  country  had  been  effected  independently  of  the  American 
and  Continental  interests,  under  the  name  of  the  Atlantic  Snuff 
Company.  The  output  of  this  concern  was  greater  than  that  of 
the  Continental  and  American  together.  During  1899  a  vigorous 
competitive  warfare  was  conducted  between  these  two  groups  of 
interests.  Early  in  1900,  however,  they  came  together  in  the 
formation  of  the  American  Snuff  Company,  which  also  took  in 
another  important  concern,  the  George  W.  Helme  Company. 

The  American  Snuff  Company  was  organized  on  March  12, 
1900.  It  issued  512,000,000  of  6  per  cent  preferred  and 
$11,001,700    of    common    stock.      The    American    and    Conti- 


THE   TOBACCO   MONOPOLY  275 

nental  interests  (including  the  Lorillard  Company)  received 
^10,000,000,  the  Atlantic  Snuff  Company  interest  ^10,000,000, 
and  the  Helme  Company  $3,000,000  of  the  stock.  The  Atlantic 
Snuff  Company  interests,  however,  obtained  three  quarters 
preferred  and  one  quarter  common  stock,  while  the  American 
Tobacco  Company  interests  received  only  one  quarter  preferred 
and  three  quarters  common.  The  common  stock  was  at  first 
considered  of  much  less  value  than  the  preferred ;  but  with  the 
growing  prosperity  of  the  business  arising  largely  from  the 
almost  complete  monopoly  the  common  stock  has  now  become 
the  more  valuable.  It  has  paid  regularly  for  several  years  10 
per  cent  dividends,  while  the  company  has  also  accumulated  a 
large  surplus.^ 

The  Combination's  Control  of  the  Industry  in   1900 

The  organization  of  the  Continental  Tobacco  Company,  the 
American  Tobacco  Company's  acquisition  of  the  Union  Tobacco 
Company  and  of  other  concerns  in  1899,  and  the  formation 
of  the  American  Snuff  Company  at  once  raised  the  Tobacco 
combination  to  a  dominant  position  in  the  manufacture  of  all 
the  important  kinds  of  tobacco  except  cigars.  In  1900  the 
combination  had  62  per  cent  of  the  national  output  of  plug 
tobacco  and  59.2  per  cent  of  the  output  of  smoking  tobacco;  in 
1901,  the  first  full  year  of  the  American  Snuff  Company,  it  had 
80.2  per  cent  of  the  output  of  snuff.  In  1897  the  American 
Tobacco  Company  had  controlled  barely  a  fifth  of  any  one  of 
these  products.  The  combination,  moreover,  still  retained  sub- 
stantially a  monopoly  control  over  the  cigarette  business, 
making  92.7  per  cent  of  the  national  output  in  1900. 

The  Cigar  Combination 

Last  of  all  the  combination  turned  its  attention  to  the  cigar 
business,  the  most  important  of  all  the  branches  of  tobacco 
manufacture,  but  also  the  most  difficult  in  which  to  make  an 
effective  combination,  because  of  the  immense  number  of  con- 
cerns in  the  trade. 

1  1908-9,  16  p.c;    then  to  1912,  20  p.c.  dividends  with  extras.     Ed. 


2/6  TRUSTS,    POOLS   AND    CORPORATIONS 

Since  1891  the  American  Tobacco  Company  had  had  a  con- 
siderable business  in  the  manufacture  of  cheroots,  but  had 
made  no  ordinary  cigars.  Soon  after  the  organization  of  the 
Continental  Tobacco  Company,  however,  the  American  began 
plans  to  enter  the  cigar  business.  Inasmuch  as  it  had  found 
that  its  position  in  the  cigarette  business  had  been  greatly 
strengthened  by  the  control  of  machine  patents,  it  began  experi- 
mentation with  machines  for  making  cigars.  Up  to  the  present 
time,  however,  machinery  has  become  of  comparatively  little 
importance  in  the  manufacture  of  any  but  the  cheaper  types  of 
cigars.  Nevertheless,  the  American  Tobacco  Company  interests 
in  1 90 1  entered  extensively  into  the  cigar  business  by  the  or- 
ganization of  the  American  Cigar  Company. 

This  company,  incorporated  January  12,  1901,  started  with 
an  authorized  capital  stock  of  $10,000,000,  of  which  $9,965,000 
was  issued.  The  Continental  and  American  tobacco  companies 
each  took  $3,500,000  of  the  stock.  Soon  afterwards  $10,000,- 
000  of  ten-year  gold  notes  were  issued  by  the  American  Cigar 
Company,  guaranteed  by  the  same  two  companies.  In  1905, 
$10,000,000  of  preferred  stock  was  issued. 

The  American  Cigar  Company  took  over  the  greater  part  of 
the  cheroot  and  small-cigar  business  of  the  American  Tobacco 
Company,  and  proceeded  to  buy  up  a  number  of  existing  cigar- 
manufacturing  concerns.  The  most  important  was  Powell, 
Smith  &  Co.,  an  arrangement  for  the  absorption  of  which  had 
been  made  even  before  the  organization  of  the  American  Cigar 
Company.  Another  important  acquisition  was  that  of  the 
Havana-American  Company,  a  combination  which  had  been  es- 
tablished by  other  interests  in  1899  and  which  controlled  an 
annual  output  of  about  100  million  high-grade  cigars,  chiefly 
made  from  Cuban  tobacco. 

The  acquisitions  made  by  the  American  Cigar  Company  in 
1 901  immediately  made  it  the  largest  single  manufacturer  of 
cigars  in  the  country,  but  it  did  not  then  possess,  and  has  never 
since  possessed,  any  large  proportion  of  the  total  cigar  business 
of  the  United  States.  During  the  years  1901  to  1903,  however, 
it  greatly  increased  its  output,  though  only  at  the  expense  of 
heavy  losses,  due  to  extravagant  advertising  and  schemes  and 


THE   TOBACCO    MONOPOLY  277 

deals  in  connection  with  the  American  and  Continental  com- 
panies. In  1903  it  had  about  one  sixth  of  the  cigat^utput  of 
the  United  States. 

The  new  capital  made  available  by  the  Consolidated  Tobacco 
Company,  which  was  organized  soon  after  the  American  Cigar 
Company,  was  in  part  used  in  this  expansion  of  the  cigar  busi- 
ness. 

The  Consolidated  Tobacco  Company,   1901 

The  Consolidated  Tobacco  Company,  organized  in  June,  1901, 
still  further  cemented  the  union  between  the  two  principal  com- 
binations—  the  American  and  Continental  companies  —  by  ac- 
quiring nearly  the  entire  amount  of  the  common  stock  of  both. 
The  Consolidated  also  gave  still  more  complete  control  to  the 
few  men  who  were  already  the  leaders  in  the  management  and 
gave  them  the  surplus  profits  of  the  business.  An  immediate 
object,  however,  was  to  secure  additional  capital  for  the  expan- 
sion of  the  business  of  the  combination,  particularly  in  the  cigar 
industry  and  in  foreign  countries. 

The  Consolidated  Tobacco  Company  had  at  the  outset  a 
capital  stock  of  $30,000,000,  which  was  paid  in  in  cash;  this 
was  increased  to  $40,000,000  at  the  end  of  1902.  Immediately 
after  its  organization  the  Consolidated  issued  a  circular,  giving 
the  names  of  its  directors,  who  were  mostly  men  already  in  the 
directorates  of  the  other  two  companies,  and  offering  to  ex- 
change its  4  per  cent  bonds  in  equal  amounts  for  the  common 
stock  of  the  Continental  Tobacco  Company,  and  to  exchange 
them  at  the  rate  of  $200  for  $100  for  the  common  stock  of  the 
American  Tobacco  Company.  The  offer  was  promptly  ac- 
cepted by  nearly  all  the  stockholders.  Ultimately  the  amount 
of  bonds  issued  by  the  Consolidated  for  this  purpose  became 
^I57.378>200,  with  which  $54,274,550  of  American  and  $48,- 
829,100  of  Continental  common  stock  were  acquired.  The  ex- 
change of  a  double  amount  of  bonds  for  the  American  Tobacco 
Company  stock  meant,  of  course,  a  still  larger  overcapitaliza- 
tion as  compared  with  the  actual  investment. 

The  owners  of  the  stock  of  the  Consolidated  thus  acquired  ef- 
fective control  of  both  the  American  and  the  Continental,  and 


278  TRUSTS,    POOLS   AND    CORPORATIONS 

became  entitled  to  all  the  profits  of  both  in  excess  of  the  fixed 
amounts  required  for  dividends  on  their  preferred  stocks  and 
for  interest  on  the  Consolidated  bonds.  This  exchange  of  stock 
for  bonds  had  appeared  at  the  time  highly  advantageous  to  the 
common-stock  holders  of  the  American  and  Continental  com- 
panies. The  Continental  common  stock  had  never  paid  a  divi- 
dend, and  during  much  of  the  time  had  sold  at  between  $20  and 
$30  per  $100  share;  the  holders  were  now  guaranteed  4  per 
cent  on  the  par  value.  The  American  Tobacco  Company's 
common  stock,  since  the  declaration  of  the  100  per  cent  stock 
dividend  in  1899,  had  paid  only  6  per  cent,  and  the  exchange 
was  equivalent  to  a  guaranty  of  8  per  cent.  The  actual  earn- 
ings of  the  company  were  about  9  per  cent. 

Nevertheless,  the  transaction  actually  proved  enormously 
profitable  to  the  men  who  organized  the  Consolidated  Tobacco 
Company.  Those  men  had  been  for  the  most  part  in  the  di- 
rectorates of  the  American  and  Continental  companies,  and  they 
were  in  a  far  better  position  than  most  outside  stockholders  to 
form  a  correct  judgment  as  to  the  probable  great  increase  in 
profits  that  was  likely  to  occur  in  the  near  future. 

The  probability  of  such  an  increase  in  profits  lay  in  the 
changes  in  the  internal-revenue  taxes  on  tobacco  products. 
Those  taxes  had  been  greatly  increased  in  1898,  to  provide 
funds  for  the  Spanish  war.  Already,  before  the  organization  of 
the  Consolidated,  Congress  had  passed  an  act  to  reduce  the  tax 
on  "  manufactured  tobacco"  {i.e.,  chewing  and  smoking  to- 
bacco) and  snuff  from  12  cents  to  9.6  cents  per  pound  and  that 
on  cigarettes  from  $1.50  to  $1.08  per  thousand  (54  cents  for 
cheap  grades).  This  reduction  was  to  take  effect  on  July  i, 
1901,  or  a  few  weeks  after  the  Consolidated  was  established. 
Presumably,  also,  the  directors  of  that  concern  foresaw  that  the 
tax  on  manufactured  tobacco  and  snuff  would  be  still  further  re- 
duced later,  to  bring  it  back  to  the  basis  which  had  existed  be- 
fore the  war.  This  actually  occurred  in  1902,  when  it  was  made 
6  cents.  When  the  tax  had  been  advanced,  the  manufacturers 
of  tobacco  had  barely  been  able  to  raise  prices  sufficiently  to 
recoup  themselves;  but  the  men  connected  with  the  Consolidated 
evidently  foresaw  that  prices  would  not  have  to  be  reduced  by 


THE   TOBACCO   MONOPOLY  279 

an  amount  at  all  commensurate  with  the  reductionj^  the  taxes 
—  particularly  in  view  of  the  large  proportion  of  the  business . 
now  possessed    by  the   combination  and    its  consequent    large 
measure  of  control  over  prices  —  and  that  consequently  profits 
would  greatly  increase. 

Such,  in  fact,  proved  to  be  the  case.  On  the  basis  of  the  rate 
of  earnings  of  the  American  and  Continental  prior  to  the  forma- 
tion of  the  Consolidated,  it  would  scarcely  have  been  possible 
to  pay  dividends  on  their  preferred  stocks  and  interest  on  the 
Consolidated  bonds.  During  the  three  years  and  four  months 
following  the  organization  of  the  Consolidated,  however,  the 
earnings  of  the  two  companies  were  sufficient  to  pay  those 
charges  and  also  to  leave  a  profit  of  fully  $30,000,000  to  the 
Consolidated  on  its  investment  of  $30,000,000  (part  of  the  time 
$40,000,000).  That  company  during  this  period  of  time  paid 
$6,000,000  in  dividends,  accumulated  a  surplus  of  $17,000,000, 
and  substantially  became  entitled  also  to  the  increase  in  the  sur- 
pluses of  the  American  and  Continental  Companies,  amounting 
to  over  $7,000,000. 

The  benefit  in  this  increase  in  profits  was,  by  reason  of  the 
organization  of  the  Consolidated,  largely  concentrated  in  the 
hands  of  a  few  men.  This  is  seen  in  the  fact  that  immediately 
after  the  organization  of  the  Consolidated  more  than  half  of  its 
shares  were  held  by  six  men — James  B.  Duke,  A.  N.  Brady, 
O.  H.  Payne,  Thomas  F.  Ryan,  P.  A.  B.  Widener,  and  William 
C.  Whitney.  Through  the  ownership  of  the  stocks  of  the 
American  and  Continental  by  the  Consolidated,  these  six  men 
were,  moreover,  in  position  to  dominate  the  entire  combination. 
The  same  six  men  had  just  previously  owned  only  a  minority  of 
the  stocks  of  the  American  and  apparently  very  little  of  the 
Continental,  though  they  had  been  very  powerful  in  the  manage- 
ment of  both.  Most  of  these  men,  it  will  be  observed,  were  the 
financiers  who  had  entered  the  combination  in  1898  and  1899. 
They  and  a  few  associates  had  supplied  the  greater  part  of  the 
new  capital  now  made  available  for  the  expansion  policy;  but 
they  did  so  only  because  it  was  evident  that,  through  the  organ- 
ization of  the  Consolidated,  they  might  enormously  increase  their 
power  and  their  share  in  the  prospective  profits  of  the  business. 


28o  TRUSTS,   POOLS  AND   CORPORATIONS 

The  British  Campaign  of  the  Combination,   1901-2^ 
Combination  in  the  Cuban  Cigar  Business,   1902 

Another  direction  in  which  expansion  was  now  sought  was  in 
cigar  manufacture.  Here,  too,  the  new  capital  furnished  by  the 
Consohdated  was  useful.  Aside  from  the  activity  of  the  Ameri- 
can Cigar  Company  in  the  domestic  trade,  already  referred  to, 
that  company  now  undertook  to  secure  a  dominant  position  in 
the  important  cigar  business  of  Cuba. 

Early  in  1902  it  bought  two  large  factories  at  Havana,  com- 
bining them  under  the  name  of  H.  de  Cabanas  y  Carbajal 
(Incorporated).  This  company  issued  $1,500,000  of  stock,  all 
of  which  was  held  by  the  American  Cigar  Company.  Shortly 
afterwards,  on  May  28,  1902,  the  Havana  Tobacco  Company 
was  organized.  It  took  over  the  Stocks  of  Henry  Clay  and 
Bock  &  Co.,  and  the  Havana  Commercial  Company,  two  com- 
binations which  had  been  formed  by  independent  interests  some 
time  before,  and  also  that  of  the  Cabanas  y  Carbajal  Company. 
The  new  corporation  issued  no  less  than  $30,000,000  of  common 
stock  and  $5,000,000  of  preferred,  together  with  $7,500,000 
of  bonds.  The  American  Cigar  Company  received  for  the 
$1,500,000  of  Cabanas  y  Carbajal  stock  $20,000,000  of  common 
stock  of  the  Havana  Tobacco  Company  and  $2,625,000  of  its 
bonds.  The  common  stock  had  little  value,  except  for  purposes 
of  control,  and  has  never  paid  a  dividend.  The  Havana  Tobacco 
Company  from  the  outset  controlled  a  large  proportion  of  the 
manufacture  of  cigars  in  Cuba. 

The  American  Cigar  Company  also  turned  its  attention  to  the 
manufacture  of  Stogies,  a  cheap  form  of  cigar.  A  combination 
called  the  United  States  Cigar  Company  had  already  been  made 
by  leading  stogie  manufacturers,  independently  of  the  American 
Cigar  Company.  In  1903  the  American  Stogie  Company  was 
organized,  issuing  $976,000  of  preferred  stock  and  $10,879,000 
of  common  stock.  It  took  over  the  assets  of  the  earlier  com- 
bination, giving  for  them  $976,000  in  preferred  stock  and  about 
$2,500,000    in    common   stock.     The  majority  of   the  common 

^  See  p.  298,  infra. 


THE   TOBACCO    MONOPOLY  281 

stock,  however,  was  given  to  the  American  Cigar^ompany. 
The  company  was  enormously  overcapitalized,  and  this  stock 
had  little  value  except  for  purposes  of  control,  and  has  never 
paid  a  dividend. 

Merger  in  the  American  Tobacco  Company,   1904 

The  control  of  the  Tobacco  combination  continued  to  be 
exercised  through  the  Consolidated  Tobacco  Company  until 
October  19,  1904.  At  that  time  the  Consolidated  and  its  two 
subsidiary  companies,  the  American  and  the  Continental,  were 
all  merged  into  one  company  called  the  American  Tobacco 
Company.  This  merger  was  prompted  in  part  by  the  adverse 
decision  of  the  Supreme  Court  of  the  United  States  in  the 
Northern  Securities  case.  The  Consolidated  Tobacco  Company 
was  purely  a  stockholding  company,  somewhat  analogous  to  the 
Northern  Securities  Company.  The  merger  further  fortified 
the  dominant  position  of  the  men  already  in  control  of  the 
Tobacco  combination.  It  also  served  to  simplify  the  organiza- 
tion and  the  securities  of  the  combination. 

The  merger  was  accomplished  by  giving  the  securities  of  the 
reorganized  American  Tobacco  Company  in  exchange  for  all 
the  securities  of  the  Consolidated,  Continental,  and  old  American 
companies  which  were  in  the  hands  of  the  public  (this  term 
being  used  to  designate  all  holders  except  the  three  big  com- 
panies themselves),  such  previous  securities  being  thereupon 
canceled,  and  by  the  direct  cancellation  of  intercompany  hold- 
ings. The  small  amount  of  American  and  Continental  common 
stock  which  was  in  the  hands  of  the  public,  $242,400,  and  the 
stock  of  the  Consolidated  Tobacco  Company,  $40,000,000,  were 
exchanged  for  an  equal  amount  of  common  stock  of  the  re- 
organized American.  The  preferred  stock  of  the  American 
Tobacco  Company,  all  of  which  was  in  the  hands  of  the  public, 
and  that  part  of  the  preferred  stock  of  the  Continental  Tobacco 
Company  which  was  in  the  hands  of  the  public  (about  two-thirds 
of  the  total),  were  exchanged  for  6  per  cent  bonds  of  the  re- 
organized American  Tobacco  Company  on  such  a  basis  as  to 
make  the  return  to  the  holder  the  same  as  before.     The  immense 


282  TRUSTS,   POOLS  AND   CORPORATIONS 

amount  of  Consolidated  Tobacco  Company  bonds,  $157,378,200, 
which  had  been  issued  against  the  common  stocks  of  the  Ameri- 
can and  Continental  companies,  was  exchanged  dollar  for  dollar, 
half  for  preferred  stock  of  the  reorganized  American  bearing 
6  per  cent  dividends  and  half  for  its  4  per  cent  bonds.  The 
result  was  that  the  reorganized  American  Tobacco  Company  had 
outstanding  in  1904,  $40,242,400  of  common  stock,  $78,689,100 
of  preferred  stock,  and  $136,360,600  of  bonds. 

The  preferred  stock  of  the  new  American  Tobacco  Company 
was  given  no  voting  power  for  the  election  of  directors  or  on 
ordinary  matters.  The  power  of  the  men  who  had  controlled 
the  Consolidated  stock  was  thus  made  even  more  secure  under 
the  reorganization  than  it  had  been  during  the  existence  of  the 
Consolidated  Tobacco  Company,  for  at  that  time  the  preferred 
stocks  of  the  American  and  Continental  companies,  which  were 
largely  in  the  hands  of  the  outsiders,  had  a  voting  power,  al- 
though those  stocks  were  a  minority  as  compared  with  the 
common  stock  held  by  the   Consolidated, 

General  Policy  of  Absorption  and  Domination 

The  history  of  the  Tobacco  combination  thus  presented 
shows  plainly  that  the  leading  purpose  of  the  men  who  have 
controlled  it  has  been  to  dominate  the  tobacco  industry.  They 
started  out  by  practically  monopolizing  the  cigarette  business. 
With  the  great  profits  derived  from  that  source  they  carried  on 
a  strenuous  competitive  fight  in  the  plug  industry,  which  ulti- 
mately forced  the  leading  competing  manufacturers  into  com- 
bination with  themselves.  This  secured  for  the  combination  a 
dominant  position  in  the  manufacture,  not  only  of  plug,  but  of 
smoking  tobacco.  Soon  after,  the  combination  in  the  snuff 
industry  was  brought  about,  and  subsequently  a  combination  in 
the  cigar  industry.  The  latter,  however,  controls  only  a  limited 
proportion  of  the  business. 

The  successive  combinations  which  these  men  have  established, 
except  that  in  the  cigar  business,  at  the  outset  took  in  the  leading 
manufacturers  and  secured  a  very  large  degree  of  control  over 
the  business.     That  degree  of  control,  however,  has  been  further 


THE   TOBACCO    MONOPOLY  283 

extended  by  the  acquisition,  either  by  direct  purchase  or  by 
securing  a  controlling  stock  interest,  of  a  very  largtftiumber  of 
other  competing  concerns.  The  total  number  of  formerly  sepa- 
rate concerns  and  combinations  which  have  passed  under  the 
control  of  the  Tobacco  combination  is  in  the  neighborhood  of 
250.  This  number  includes  the  concerns  which  originally 
entered  the  several  combinations,  but  such  original  acquisitions, 
though  in  general  they  were  the  largest  concerns,  were  much 
less  numerous  than  the  concerns  acquired  subsequent  to  the 
formation  of  the  combinations.  It  appears  to  have  been  the 
policy  in  fact  to  buy  up,  from  time  to  time,  most  competitors 
whose  business  had  become  successful. 

The  effect  of  these  later  acquisitions  is  best  seen  in  the  in- 
crease in  the  proportion  of  the  business  controlled.  In  1900, 
shortly  after  the  formation  of  the  Continental  Tobacco  Com- 
pany, the  Tobacco  Company  controlled  about  60  per  cent  of 
the  production  of  chewing  and  smoking  tobacco  in  the  United 
States.  In  1906  it  controlled  81.8  per  cent  of  the  chewing 
tobacco  and  70.6  per  cent  of  the  smoking  tobacco.  Its  pro- 
portion of  the  manufacture  of  snuff  increased  from  80.2  per 
cent  in  1901,  the  first  full  year  of  the  operation  of  the  American 
Snuff  Company,  to  96  per  cent  in  1906. 

A  significant  feature  of  many  of  the  acquisitions  of  the  combi- 
nation, particularly  during  the  period  from  1902  to  1904,  is  the 
fact  that  they  were  made  secretly  and  that  the  American  To- 
bacco Company  interests,  as  long  as  possible,  concealed  their 
control,  continuing  to  operate  the  concerns  as  though  independ- 
ent and  often  using  them  as  a  special  instrument  for  attacking 
the  business  of  genuine  competitors. 

Aside  from  concerns  engaged  in  tobacco  manufacture,  the 
American  Tobacco  Company,  and  to  a  less  extent  the  other 
affiliated  combinations,  have,  particularly  since  1899,  acquired 
control  of  many  concerns  engaged  in  enterprises  contributory  to 
tobacco  manufacture.  Concerns  thus  brought  under  the  control 
of  the  combination  include  many  engaged  in  the  wholesale  or 
retail  distribution  of  tobacco  products,  several  producing  leaf 
tobacco  in  Cuba  and  Porto  Rico,  a  number  which  make  pack- 
ages and  materials,  other  than  tobacco,  used  in  tobacco  manufac- 


284  TRUSTS,    POOLS   AND    CORPORATIONS 

ture,  several  which  exploit  patents  for  machinery  or  manufacture 
machinery  for  the  use  of  tobacco  factories,  and  a  few  which 
handle  by-products,  make  smokers'  supplies,  etc.  The  most 
important  of  these  contributory  enterprises  of  which  the  combi- 
nation has  secured  control  is  the  manufacture  of  licorice,  which 
is  a  very  important  material  in  tobacco  manufacture.  Through 
the  MacAndrews  &  Forbes  Company,  which  has  bought  up 
several  competing  concerns,  the  American  Tobacco  Company 
interests  have  substantially  a  complete  monopoly  of  the  licorice 
business. 


PRESENT   ORGANIZATION   AND   BUSINESS   OF  THE   TOBACCO 

COMBINATION 

The  Four  Principal  Companies  in  the  Combination 

The  history  of  the  Tobacco  combination  has  made  it  clear 
that  the  American  Tobacco  Company  has  throughout  been  the 
principal  factor,  and  this  is  still  more  true  since  the  reorganiza- 
tion of  1904,  which  united  the  Consolidated,  American,  and 
Continental  companies  under  the  new  corporation  with  the  old 
name,  American  Tobacco  Company.  There  are  three  other 
corporations  still,  however,  whose  position  in  the  Tobacco  com- 
bination distinguishes  them  from  the  great  majority  of  the  sub- 
sidiary companies.  These  are  the  American  Snuff  Company, 
the  American  Cigar  Company,  and  the  British- American  Tobacco 
Company. 

The  American  Tobacco  Company  not  only  controls  the  other 
three  principal  companies  named,  but  is  itself  a  great  manufac- 
turing concern,  and  it  also  directly  controls  a  large  number 
of  other  subsidiary  companies.  The  field  of  the  American 
Tobacco  Company  and  these  subsidiary  companies  includes  the 
manufacture  of  chewing  and  smoking  tobacco,  of  cigarettes  for 
domestic  consumption,  and  of  so-called  little  cigars,  together 
with  enterprises  contributory  to  these  branches  of  tobacco 
manufacture. 

The  American  Snuff  Company,  with  its  subsidiary  companies, 
is  exclusively  concerned  with  the  manufacture  of  snuff. 


i 


THE   TOBACCO    MONOPOLY  285 

The  American  Cigar  Company,  with  its  subsidiaries,  handles 
the  cigar  business  of  the  combination,  including  ttr^  manufac- 
ture of  ordinary  cigars,  cheroots  and  stogies  in  the  United 
States  and  the  manufacture  of  cigars  and  cigarettes  in  Cuba  and 
Porto  Rico. 

The  British-American  Tobacco  Company  is  distinguished 
from  the  others  by  being  confined  to  export  business  and  to  the 
manufacture  and  sale  of  tobacco  in  foreign  countries. 

The  American  Tobacco  Company  holds  considerably  more 
than  a  majority  of  the  capital  stock  of  the  American  Cigar  and 
British-American  companies  and  over  40  per  cent  of  the  stock 
of  the  American  Snuff  Company.  By  reason  of  the  fact  that 
certain  large  individual  stockholders  of  the  American  Tobacco 
Company  are  also  stockholders  in  the  American  Snuff  Company, 
and  by  reason  of  the  identity  of  purposes,  the  American  Snuff 
Company  may  properly  be  considered  as  controlled  by  the 
American  Tobacco  Company. 

The  Subsidiary  Companies 

Aside  from  these  four  principal  companies,  there  are  82  other 
companies  in  the  Combination  which  do  business  in  the  United 
States,  Porto  Rico,  and  Cuba,  besides  a  considerable  number 
controlled  by  the  British-American  Tobacco  Company,  which 
do  business  in  other  countries.  In  practically  every  one  of 
these  82  companies  a  majority  of  the  stock  is  held  either  by  one 
of  the  four  principal  companies  or  by  some  company  subsidiary 
to  them.  In  a  large  number  of  cases  the  entire  stock  of  these 
subsidiary  companies  is  thus  held.  The  combination  in  buying 
stocks  has  apparently  sought  control  even  more  than  investment. 

The  American  Tobacco  Company  itself  controls  directly  or 
indirectly  47  of  these  subsidiary  companies,  aside  from  control- 
ling the  three  principal  subsidiary  combinations.  The  Ameri- 
can Snuff  Company  controls  6  other  companies,  the  American 
Cigar  Company  26,  and  the  British-American  Tobacco  Com- 
pany 3  (these  3  companies  buy  leaf  and  manufacture  tobacco 
in  the  United  States  for  export) ;  the  British-American  also  con- 
trols many  subsidiary  companies  operating  in  other  countries. 


286  TRUSTS,    POOLS   AND   CORPORATIONS 

Concentration  of  Control 

The  American  Tobacco  Company,  therefore,  stands  in  a  con- 
trolling position  over  the  entire  Tobacco  combination  with  its 
86  companies  operating  in  the  United  States,  Porto  Rico,  and 
Cuba.  The  control  of  the  American  Tobacco  Company  itself 
rests  in  a  very  few  hands.  That  company  had  at  the  end  of 
1906  a  total  capitaHzation  of  a  little  over  235  milHons,  including 
bonds,  but  of  this  capitaHzation  only  about  one  sixth  —  namely, 
the  common  stock,  amounting  to  a  little  over  40  millions  —  has 
voting  power  for  the  election  of  directors  or  for  the  ordinary 
management  of  the  business.  The  great  bulk  of  the  common 
stock  is  held  by  members  of  the  directorate  of  the  American 
Tobacco  Company  and  their  intimate  associates.  The  28  direc- 
tors and  4  other  stockholders  together  own  'j'j  per  cent  of  this 
stock.  Indeed,  the  ten  largest  stockholders,  7  of  whom  are 
directors,  together  hold  over  60  per  cent,  and  these  10  alone 
can,  therefore,  readily  dominate  the  entire  combination.  They 
are  J.  B.  Duke  (president  of  the  company),  A.  N.  Brady,  O. 
H.  Payne,  P.  A.  B.  Widener,  Thomas  F.  Ryan,  B.  N.  Duke, 
G.  B.  Schley,  the  banking  and  brokerage  firm  of  Moore  & 
Schley  (chiefly  as  agents  for  clients),  and  the  estates  of  W.  C. 
Whitney  and  W.  L.  Elkins. 

Capitalization  of  the  Combination 

The  American  Tobacco  Company  is  authorized  to  issue 
$  80,000,000  of  6  per  cent  cumulative  preferred  stock  and  $100,- 
000,000  of  common  stock,  but  only  about  two  fifths  of  the  latter 
has  been  issued.  The  amount  of  each  class  of  securities  out- 
standing at  the  end  of  1906  was  : 

Common  stock $40,242,400 

Preferred  stock,  6  per  cent  cumulative 78,689,100 

Six  per  cent  gold  bonds,  due  1944 55,208,350 

Four  per  cent  gold  bonds,  due  195 1 161,052,100 

Total $235,191,950 

1  Including  $  5,010,500  of  Consolidated  Tobacco  Company  bonds  assumed  by  the 
American  Tobacco  Company. 


THE   TOBACCO    MONOPOLY  287 

The  total  capitalization  of  all  the  86  companies  making  up 
the  combination  in  the  United  States,  Porto  Rico7*and  Cuba 
amounted  at  the  end  of  1906  to  ^50,395, 890,  consisting  of 
about  130  millions  of  preferred  stock,  about  183  millions  of 
common  stock,  and  about  137  millions  of  bonds.  Of  this  capi- 
talization, however,  a  large  amount  is  duplicated  by  reason  of 
the  holding  of  securities  in  one  company  by  another  company 
in  the  combination.  The  total  amount  thus  held  is  a  little 
over  134  millions  (about  half  a  million  of  which  is  stock  of  the 
American  Tobacco  Company  itself),  leaving  as  the  net  capitali- 
zation in  the  hands  of  the  public  (including  the  directors  and 
their  associates  as  well  as  all  other  holders  except  companies  in 
the  combination)  $316,346,821.  This  latter  amount  consists  of 
about  103  millions  of  preferred  stock,  about  79  millions  of  com- 
mon stock,  and  about  133  millions  of  bonds.  Of  the  316  mil- 
lions of  securities  in  the  hands  of  the  public,  235  millions,  or 
about  three  fourths,  consist  of  the  issues  of  the  American  To- 
bacco Company  itself.  The  gross  outstanding  capitalization  of 
all  the  other  companies  is  $215,203,940,  but  of  this  amount 
more  than  60  per  cent,  or  nearly  134  millons,  is  held  by  com- 
panies in  the  Combination. 

The  Policy  of  Stock  Ownership 

The  extent  to  which  the  Tobacco  combination  has  maintained 
its  control  through  stock  ownership  in  subsidiary  companies, 
instead  of  through  direct  ownership  of  all  plants  and  other 
assets,  shows  that  this  method  of  control  must  possess  certain 
special  advantages.  This  policy  of  stock  ownership  has  been 
particularly  conspicuous  since  1899. 

When  this  policy  of  stock  acquisition  was  first  inaugurated,  it 
was  the  more  common  practice  of  the  combination  to  acquire  only 
a  controlling  interest  in  the  securities  of  other  corporations,  leav- 
ing a  minority  in  the  hands  of  the  former  owners.  This  prac- 
tice had  various  apparent  advantages.  Through  it  the  Com- 
bination was  able  to  acquire  control  over  business  without  a 
correspondingly  great  investment  of  capital.  In  some  instances 
it  secured  stock  interests  in  concerns  engaged  in  contributory 


288  TRUSTS,    POOLS  AND   CORPORATIONS 

enterprises  without  investment  of  capital,  but  merely  in  return 
for  contracts  for  the  supply  of  materials  or  services  to  the  com- 
bination. In  numerous  cases  it  appeared  advantageous  to  leave 
a  minority  of  the  stock  in  the  hands  of  the  original  owners  in 
order  to  retain  their  interest  and  skill  and  to  take  advantage 
of  their  personal  following  among  customers.  In  some  cases, 
moreover,  owners  of  enterprises  were  unwilling  to  sell  out  abso- 
lutely, with  the  consequent  result  of  having  either  to  quit  the 
business  or  become  mere  salaried  employees,  but  were  willing 
to  transfer  a  controlling  interest  to  the  combination.  Even  at 
this  time,  however,  the  combination  acquired  the  entire  capital 
stock  of  certain  corporations  and  retained  their  separate  exist- 
ence, and  recently  this  has  been  its  prevalent  practice.  The 
combination  has,  in  fact,  during  the  past  few  years,  acquired 
the  remaining  shares  in  a  considerable  number  of  companies  in 
which  it  at  first  held  only  a  controlling  interest.  Various  rea- 
sons have  led  the  combination  to  continue  the  separate  cor- 
porate existence  of  many  of  the  concerns  which  it  thus  com- 
pletely owned.  Aside  from  advantages  arising  from  legal 
considerations  —  the  avoidance  of  the  necessity  of  making  re- 
ports of  the  business  of  the  parent  corporation  in  compliance 
with  the  laws  of  certain  States,  economy  with  respect  to  cor- 
poration fees  and  taxes,  and  the  like  —  the  continued  existence 
of  such  concerns  has  often  been  highly  desirable  on  account  of 
the  trade  value  of  their  names. 

Secretly  Controlled  Companies 

The  most  important  motive,  however,  for  the  continuance  of 
separate  corporate  existence  in  the  case  of  many  concerns  has 
been  the  desire  of  the  combination  to  keep  its  control  secret. 
There  is  a  strong  feehng  among  many  dealers  and  consumers 
against  "trusts"  in  general  and  the  "Tobacco  Trust"  in  par- 
ticular. Independent  manufacturers  have  extensively  taken 
advantage  of  this  feeling  and  have  advertised  their  goods  as 
"  Independent,"  "  Not  made  by  a  Trust,"  and  so  forth.  The 
attitude  of  the  American  Tobacco  Company  and  its  openly 
affiliated  concerns  in  refusing  to  deal  with  labor  organizations 


THE   TOBACCO    MONOPOLY  289 

has  also  caused  hostility  among  union  laboring  men,  many  of 
whom  insist  on  buying  "  union-label  "  goods.  Man}rindepend- 
ent  manufacturers  have  availed  themselves  of  the  union-label 
sentiment  to  build  up  a  trade. 

In  order  to  overcome  the  effects  of  the  antitrust  sentiment 
and  the  union-label  sentiment,  and  even  to  take  advantage  of 
them,  the  Tobacco  combination,  particularly  during  1903  and 
1904,  secretly  acquired  a  controlling  interest  in  numerous  con- 
cerns which  had  been  catering  to  customers  who  held  those 
sentiments.  Such  concerns  continued  to  operate  under  their 
former  management  and  kept  up  a  pretense  of  independence 
and  of  hostility  to  the  combination.  Those  which  employed 
union  labor  continued  to  do  so  and  advertised  the  union  label. 
These  secretly  controlled  concerns  were,  until  the  facts  were 
disclosed  by  the  Government,  a  powerful  engine  of  warfare 
against  the  genuine  independents  and  were  looked  upon  by  the 
latter  as  their  worst  enemy. 

Among  the  concerns  of  which  control  was  thus  secretly  ac- 
quired and  for  a  greater  or  less  period  secretly  maintained  by 
the    American    and    Continental    tobacco    companies    are    the 


following : 


[21  companies  by  name  omitted.] 


The  American  Tobacco  Company  Group 

The  American  Tobacco  Company  itself,  as  already  stated,  is 
a  great  manufacturing  concern,  and  it  also  controls  directly  a 
large  number  of  subsidiary  companies  engaged  in  the  same 
branches  of  tobacco  manufacture  or  in  contributory  enterprises, 
which,  with  itself,  make  up  what  may  be  called  the  American 
Tobacco  Company  group.  The  American  Tobacco  Company 
has  reserved  to  itself  and  to  these  subsidiary  companies  the 
manufacture  of  cigarettes  for  domestic  consumption  (including 
"little  cigars  ")  and  of  plug  tobacco,  smoking  tobacco,  fine-cut 
tobacco,  and  scrap  tobacco.  The  company  has  concentrated  its 
own  direct  manufacture  of  these  tobacco  products  for  the  most 
part  in  a  limited  number  of  very  large  plants,  having  closed 
most  of  the  plants  which  have  from  time  to  time  been  acquired. 


290  TRUSTS,    POOLS   AND   CORPORATIONS 

To  a  considerable  degree  the  company  has  pursued  the  policy 
of  specializing  individual  large  plants  on  a  single  class  of  prod- 
ucts. There  has  also  been  some  concentration  and  specializa- 
tion of  manufacture  in  the  hands  of  leading  subsidiary  companies 
in  this  group,  but  in  other  cases  subsidiary  corporations  have 
been  continued,  even  though  their  output  was  small  and  con- 
siderably diversified,  this  poHcy  being  chiefly  pursued  in  the  case 
of  the  secretly  controlled  concerns. 

The  cigarette  and  little-cigar  business  of  the  American  Tobacco 
Company  proper  is  conducted  in  nine  plants  ;  but  two  of  these, 
at  New  York  and  Richmond,  respectively,  make  nearly  its  entire 
direct  output  of  cigarettes  ;  and  two  others,  at  Baltimore  and 
Danville,  Va.,  make  much  the  greater  part  of  its  output  of  little 
cigars.  The  cigarettes  made  in  plants  directly  owned  by  the 
company  are  chiefly  made  from  domestic  leaf.  The  company 
had  during  1906  five  subsidiary  cigarette  companies,  the  greater 
part  of  whose  aggregate  output  consists  of  Turkish  cigarettes. 

Of  the  output  of  plug  and  twist  tobacco  by  the  American 
Tobacco  Company  group  in  1906,  about  104,000,000  pounds  were 
produced  in  plants  directly  owned  by  the  parent  company,  and 
about  40,000,000  pounds  in  plants  of  subsidiary  companies.  The 
104,000,000  pounds  were  produced  in  only  six  plants,  and  seven 
eighths  of  this  amount  was  made  in  two  of  them,  the  Liggett  & 
Myers-Drummond  branch,  at  St.  Louis,  and  the  National  To- 
bacco Works,  at  Louisville.  There  are  ten  subsidiary  companies 
manufacturing  plug  and  twist. 

The  output  of  fine-cut  tobacco  controlled  by  the  American 
Tobacco  Company  is  all  produced  in  factories  which  also  make 
smoking  tobacco,  so  that  the  two  products  may  be  considered 
together.  Of  the  total  output  of  about  115,000,000  pounds  of 
these  products  by  the  American  Tobacco  Company  group  in 
1906,  nearly  one  half  was  made  in  plants  of  subsidiary  com- 
panies. The  American  Tobacco  Company  owns  directly  nine 
plants  which  manufacture  smoking  tobacco,  of  which  five  make 
that  product  only.  The  most  important  of  these  plants  is  at 
Durham,  N.C.  ;  it  produced  nearly  18,000,000  pounds  of  gran- 
ulated smoking  tobacco,  principally  Duke's  Mixture,  in  1906. 
The  other  directly  owned  plants  making  smoking  tobacco  are 


THE   TOBACCO    MONOPOLY  291 

located  at  Baltimore,  Louisville,  St.  Louis,  Chicago,  Richmond, 
New  York,  and  New  Orleans.  Seventeen  of  tlie^subsidiary 
companies  make  more  or  less  smoking  tobacco  and  fine  cut,  but 
only  five  are  of  much  importance.  The  largest  output  is  that  of 
P.  Lorillard  Company,  of  Jersey  City.  The  next  largest  is  that 
of  the  Blackwell's  Durham  Tobacco  Company,  of  Durham, 
N.C. 

The  American  Tobacco  Company  group  also  has  a  large  out- 
put of  scrap  tobacco,  which,  although  classed  by  the  Bureau  of 
Internal  Revenue  with  smoking  tobacco,  is  chiefly  used  for 
chewing.  By  far  the  larger  part  of  the  output  of  this  product 
however,  is  in  the  hands  of  four  subsidiary  companies,  the  most 
important  of  which  are  the  Luhrman  &  Wilbern  Tobacco  Com- 
pany, of  Middletown,  Ohio,  and  the  Day  and  Night  Tobacco 
Company,  of  Cincinnati.  The  control  of  the  latter  was  at  first 
kept  secret,  as  was  that  of  the  Pinkerton  Tobacco  Company, 
another  manufacturer  of  scrap.  Spaulding  &  Merrick  also 
make  scrap. 

The  importance  of  the  American  Tobacco  Company  and  its 
directly  subsidiary  companies  as  manufacturers  of  tobacco 
products  may  be  judged  from  their  total  consumption  of  leaf 
tobacco,  which  amounted  to  nearly  281,000,000  pounds  in  1906. 
The  extent  to  which  the  Combination  has  concentrated  its 
manufacture  in  large  plants  is  seen  in  the  fact  that  one  plant, 
the  Liggett  &  Myers-Drummond  branch  at  St.  Louis,  consumed 
nearly  one  fifth  of  this  leaf  tobacco,  while  six  plants  together 
consumed  over  55  per  cent  of  the  total,  and  the  twelve  largest 
over  75  per  cent.  The  American  Tobacco  Company  has  an 
extensive  leaf  department  for  the  purchase,  drying,  stemming, 
and  storage  of  leaf  tobacco. 

The  American  Tobacco  Company  is  also  engaged  in  numerous 
contributory  enterprises  connected  with  tobacco  manufacture. 
To  some  extent  certain  of  these,  such  as  the  manufacture  of 
packages,  are  conducted  in  the  same  plants  which  manufacture 
tobacco,  but  for  the  most  part  they  are  carried  on  in  other  plants 
and  by  separate  subsidiary  companies. 

The  greatest  of  these  contributing  concerns  is  the  MacAndrews 
&  Forbes  Company,  which  has  an  almost  complete  monopoly  of 


292  TRUSTS,   POOLS  AND   CORPORATIONS 

the  manufacture  of  licorice  paste  in  the  United  States.  Licorice, 
next  to  leaf  tobacco,  is  the  most  important  raw  material  used  in 
tobacco  manufacture,  and  more  than  nine  tenths  of  the  licorice 
made  in  the  country  is  used  in  tobacco.  The  MacAndrevvs  & 
Forbes  Company  has  absorbed  several  other  formerly  independ- 
ent concerns,  and  now  not  only  furnishes  licorice  to  the  Amer- 
ican Tobacco  Company  and  its  affiliated  concerns,  but  also  to 
most  independent  tobacco  manufacturers.  The  prices  which  it 
charged  to  the  latter  were  the  subject  of  much  complaint,  and 
the  company,  along  with  the  J.  S.  Young  Company,  which  it 
afterwards  absorbed,  was  convicted  in  the  Federal  courts  of  a 
violation  of  the  Sherman  antitrust  act. 

Other  important  contributory  concerns  controlled  by  the 
American  Tobacco  Company  are  the  Conley  Foil  Company  and 
the  Johnston  Tin  Foil  and  Metal  Company,  makers  of  tinfoil ; 
the  Golden  Belt  Manufacturing  Company,  maker  of  cotton  bags 
for  packing  tobacco ;  the  Mengel  Box  Company  and  its  two 
subsidiary  concerns,  makers  of  wooden  boxes ;  the  American 
Machine  and  Foundry  Company,  the  New  Jersey  Machine 
Company,  and  the  International  Cigar  Machinery  Company,  all 
of  which  make  machinery  or  hold  and  develop  patents  therefor ; 
the  Kentucky  Tobacco  Product  Company,  which  makes  nicotine 
extracts  of  various  kinds  out  of  tobacco  stems,  the  principal  by- 
product of  tobacco  manufacture ;  and  the  Manhattan  Brier  Pipe 
Company. 

The  American  Tobacco  Company  is  also  interested  in  a  num- 
ber of  distributing  companies,  most  of  which,  however,  sell  not 
only  its  own  products  but  also  cigars  and  the  products  of  other 
branches  of  the  combination,  as  well  as  of  independent  concerns. 
The  most  important  of  these  concerns  is  the  United  Cigar  Stores 
Company  of  New  Jersey,  which  has  several  subsidiaries.  This 
company  and  most  of  its  subsidiaries  operate  chains  of  retail 
stores,  the  aggregate  number  being  about  four  hundred. 

Other  distributing  concerns  in  which  the  American  Tobacco 
Company  has  a  stock  interest  are  the  Crescent  Cigar  and 
Tobacco  Company,  of  New  Orleans,  and  Acker,  Merrall  & 
Condit,  wholesale  and  retail  grocers  of  New  York  ;  about  one 
fifth  of  the  stock  of  the  latter  company  is  held  by  the  American. 


THE   TOBACCO    MONOPOLY  293 

The  American  Tobacco  Company  also  controls  the  Thomas 
Cusack  Company,  a  bill-posting  concern,  and  the  Flot^ora  Tag 
Company,  which  is  at  present  inactive,  but  which  formerly  did 
an  immense  business  in  the  distribution  of  premiums. 

Aside  from  distributing  concerns  controlled  by  stock  owner- 
ship, the  American  Tobacco  Company  and  its  affiliated  combina- 
tions have  very  close  relations  with  many  other  distributing 
concerns.  One  method  of  establishing  such  relations  is  by 
granting  special  discounts  to  large  jobbing  concerns.  The 
smoking-tobacco  department  of  the  American  Tobacco  Com- 
pany alone  paid  in  1906  and  1907  special  commissions  to  more 
than  250  jobbers.  Such  special  commissions  are  not  at  the 
present  time  in  any  case  conditional  upon  exclusive  distribution 
of  the  American  Tobacco  Company's  products,  nor,  except  in 
cigars,  does  any  jobber  have  the  exclusive  right  to  the  wholesale 
distribution  of  the  products  of  the  combination  in  any  particular 
territory.  To  the  Metropolitan  Tobacco  Company,  however, 
the  American  Tobacco  Company  has  given  exclusive  control  of 
the  wholesale  distribution  of  its  products  in  Greater  New  York. 
Subsidiary  companies  of  the  Metropolitan  control  a  large  part 
of  New  Jersey  in  the  same  way.  The  National  Cigar  Stands 
Company,  which  operates  cigar  stands  in  a  very  large  number 
of  drug  stores  scattered  throughout  the  United  States,  as  well  as 
some  fifty  or  sixty  leading  jobbing  concerns,  has  credits  and 
loans  of  considerable  amount  extended  to  it  by  the  combination. 
In  some  cases  these  credits  are  of  such  amount  as  to  give  the 
combination  substantial  control  of  the  business. 

The  Snuff  Group 

The  American  Snuff  Company  and  its  subsidiary  companies 
are  engaged  exclusively  in  the  snuff  business.  The  parent 
company  has  outstanding  $12,000,000  of  preferred  stock  and 
$11,001,700  of  common  stock.  The  American  Tobacco  Com- 
pany, together  with  the  P.  Lorillard  Company,  which  it  controls, 
owns  $2,366,400  of  the  preferred  and  $7,500,800  of  the  com- 
mon stock,  or  42.9  per  cent  of  the  entire  issue  of  both  com- 


294  TRUSTS,    POOLS   AND    CORPORATIONS 

bined.  Although  this  is  a  minority  of  the  stock,  the  American 
Snuff  Company  is  as  essentially  a  part  of  the  one  great  Tobacco 
combination  as  the  American  Tobacco  Company  itself. 

The  American  Snuff  Company  has  closed  up  most  of  the 
plants  which  from  time  to  time  it  has  acquired  from  formerly 
independent  concerns.  In  1906  it  operated  directly  four  plants 
and  controlled  six  subsidiary  companies ;  the  latter,  however, 
were  virtually  httle  more  than  branches,  the  entire  stock  of  each 
being  held  by  the  parent  company.  The  directly  owned  plants 
produced  over  three  fifths  of  the  output  controlled  by  the  com- 
bination and  the  subsidiary  companies  all  of  the  remainder,  ex- 
cept 24,391  pounds  made  on  royalty  by  the  Irby  branch  of  the 
American  Tobacco  Company.  The  directly  owned  plants  are, 
in  the  order  of  their  importance,  the  Helmetta  (New  Jersey) 
branch,  the  Baltimore  branch,  the  Nashville  branch,  and  the 
Clarksville  (Tenn.)  branch.  The  most  important  subsidiary 
companies  in  1906  were  W.  E.  Garrett  &  Sons,  of  Yorklyn,  Del, 
and  Weyman  &  Bro.,  of  Chicago.  These  companies  have  since 
transferred  their  property  directly  to  the  American  Snuff  Com- 
pany. W.  E.  Garrett  &  Sons  in  1906  produced  more  snuff  than 
any  branch  directly  owned  by  the  American  Snuff  Company 
except  that  at  Helmetta,  N.  J.  The  next  largest  of  the  subsidi- 
ary concerns  is  the  Standard  Snuff  Company,  of  Nashville ;  the 
others  —  the  De  Voe  Snuff  Company,  Skinner  &  Co.,  and  H. 
Bolander  (Incorporated)  —  are  very  small  concerns. 

The  Cigar  Group 

The  business  of  the  American  Cigar  Company  and  its  sub- 
sidiary manufacturing  concerns  in  the  United  States  is  exclu- 
sively the  production  of  cigars,  including  cheroots  and  stogies. 
In  Cuba  and  Porto  Rico  this  group  of  companies  makes  both 
cigars  and  cigarettes. 

The  American  Cigar  Company  has  outstanding  ^10,000,000 
of  preferred  stock,  $10,000,000  of  common  stock,  and  $10,000,000 
of  ten-year  gold  notes.  The  American  Tobacco  Company  holds 
$8,970,000  of  the  preferred  stock  (besides  $500,000  held  by  the 
American  Snuff  Company)  and  $7,725,100  of  the  common  stock. 


THE   TOBACCO   MONOPOLY  295 

The  output  of  plants  operated  directly  by  the  American  Cigar 
Company  is  confined  almost  exclusively  to  ordinary  cl^rs  made 
from  domestic  leaf  and  to  cheroots.  It  had  29  plants  in  opera- 
tion in  1906,  and  their  aggregate  output  was  about  five  times  as 
great  as  the  output  of  cigars  by  all  its  subsidiary  companies 
operating  in  the  United  States.  Most  of  these  29  plants  have 
been  acquired  from  formerly  independent  concerns,  and  many 
others  so  acquired  have  been  closed.  The  two  plants  at  Jersey 
City  and  Richmond  are  the  largest  in  the  country,  making  about 
190  million  cigars  each  in  1906. 

The  American  Cigar  Company  holds  the  entire  capital  stock 
of  the  Havana-American  Company,  which  is  the  most  important 
manufacturer  of  cigars  made  from  Cuban  leaf  in  the  United 
States.  This  company  operates  10  factories,  most  of  them  at 
Key  West  and  Tampa,  Fla.  The  American  Cigar  Company 
also  holds  about  three  fifths  of  the  stock  of  the  American  Stogie 
Company,  a  heavily  overcapitalized  combination  of  stogie  manu- 
facturers (common  stock  $10,879,000,  preferred  $976,000).  This 
is  a  New  Jersey  corporation,  but  most  of  its  business  has  been 
carried  on  through  a  subsidiary  Pennsylvania  company  of  the 
same  name  (changed  in  1907  to  Union  American  Cigar  Com- 
pany), which  has  recently  announced  its  intention  of  manufac- 
turing ordinary  cigars  as  well  as  stogies. 

The  American  Cigar  Company  controls  its  important  business 
of  manufacturing  cigars  and  cigarettes  in  Cuba  through  the  Ha- 
vana Tobacco  Company,  a  greatly  overcapitalized  concern  (com- 
mon stock  $30,000,000,  preferred  $5,000,000,  bonds  $7,500,000), 
nearly  half  of  whose  stock  is  held  by  the  American  Cigar  Com- 
pany. This  company  controls  several  others  —  Henry  Clay  and 
Bock  &  Co.,  Havana  Cigar  and  Tobacco  Factories,  Havana 
Commercial  Company,  H.  de  Cabanas  y  Carbajal,  and  J.  S. 
Murias  y  Ca.  —  which  together  have  a  considerable  proportion 
of  the  manufacture  of  cigars  and  cigarettes  in  Cuba. 

The  American  Cigar  Company  further  controls,  jointly  with 
the  American  Tobacco  Company,  the  Porto  Rican-American 
Tobacco  Company  (capital  stock  $1,999,000,  scrip  $72,538), 
which  is  much  the  largest  manufacturer  of  cigars  and  cigarettes 
in  Porto  Rico.     It  is  likewise  interested  either  directly  or  indi- 


296  TRUSTS.    POOLS   AND    CORPORATIONS 

rectly  in  several  companies  which  grow  or  handle  tobacco  leaf 
in  Cuba  and  Porto  Rico. 

The  xAmerican  Cigar  Company  has  also  controUing  stock  inter- 
ests in  a  dozen  or  more  wholesale  or  retail  distributing  companies, 
most  of  which  handle  other  tobacco  products  as  well  as  cigars. 

British-American  Tobacco  Company 

The  British-American  Tobacco  Company,  which  is  the  repre- 
sentative of  the  Tobacco  Combination  in  export  and  foreign 
trade,  is  an  English  corporation.  It  has  outstanding  $7,290,000 
of  preferred  stock  and  $18,079,302  of  common  stock.  The 
American  Tobacco  Company  holds  substantially  two  thirds  of 
each  class,  namely,  $4,860,000  of  preferred  and  $11,897,255  of 
common.  Practically  all  the  rest  of  the  stock  is  held  by  the 
Imperial  Tobacco  Company,  the  great  British  combination. 

The  principal  business  of  the  British-American  Tobacco  Com- 
pany in  the  United  States  is  the  purchase  and  preparation  of 
leaf  tobacco  for  shipment  to  its  affiliated  concerns  abroad,  and 
the  manufacture  of  cigarettes  for  export.  Its  cigarette  manu- 
facture is  chiefly  conducted  in  one  plant  at  Durham,  N.  C,  but 
it  has  also  a  cigarette  plant  at  Petersburg,  Va.  The  company 
also  controls  three  subsidiary  concerns  doing  business  in  the 
United  States. 


DEVELOPMENT    OF   THE    COMBLNATION'S    CONTROL    OF    THE 
TOBACCO    INDUSTRY 

The  Combination's  Proportion  of  the  Business,   1906 

The  Tobacco  Combination,  including  the  American  Tobacco 
Company  and  the  affiliated  combinations  and  subsidiary  com- 
panies, occupies  a  ^rikingly  dominant  position  in  the  manufac- 
ture of  all  forms  of  tobacco,  except  cigars,  in  the  United  States. 
The  table  on  the  opposite  page  shows  its  proportion  of  the 
output  during   1906. 

While  the  Combination  manufactures  less  than  one  sixth  of 
the  cigars  made  in  the  United  States,  it  has  substantially  four 
fifths  of  the  combined  business  in  other  classes  of  the  tobacco 


THE  TOBACCO   MONOPOLY 


297 


THE    COMBINATION'S    PROPORTION   OF   THE   OUTPUT    OFJTOBACCO 

PRODUCTS,    1906.  ^*^ 


The  CoMBiSA-nojj 

IjfDEPEXDENT  CONCESSS 

Product 

United  States            Output            ^f  "^' 

"^               I    of  total 

Output           !    Pf «°' 
1     of  total 

Cigarettes  .     .     . 
Little  cigars    .     . 
Cigars   .... 

Xumter.                  Xumier.                                        Number. 
6,437,692,637      5,369,128,300  j       82.5          1,128,564,337                 17.5 

989,751,253     804,433,750    81.3      185,317,503 ;      18.7 
7,147,548,312  1,052,805,858     14.7    6,094,742^54       S5.3 

Plug  and  twist     . 
Smoking    .     . 
Fine  cut     . 
Snuff     .... 

XPounds                      Pounds           ,                                 Pcunds 
182,343,364          149,119,539!       81.8                33,223,825                 18.2 
175,672,171   1        124,032^20         70.6                51.639,751                 29.4 

12,742,345          10,310,960       80.9              2,431,385             19- 1 
23,518,549          22,576,722       96.0                941,527              4.0 

Total  manufac- 
tured tobacco 
and  snuff.     . 

394,276^9  '      306,039,641       77.6     ]       88,236,788  ,          22.4 

products,  its  proportion  ranging  from  70.6  per  cent  of  the  total 
output  in  the  case  of  smoking  tobacco  to  96  per  cent  in  the  case  of 
snuff.  Combining  those  products  which  are  measured  in  pounds 
—  namely,  chewing  tobacco,  smoking  tobacco,  fine-cut  tobacco, 
and  snuff  —  the  Combination's  proportion  of  the  output  is  JJ.^ 
per  cent.  The  Combination  has,  therefore,  very  strong  monopo- 
listic power. 

With  the  exception  of  cigarettes,  ver\-  nearly  the  entire  quan- 
tity of  manufactured  tobacco  products  made  in  the  United  States 
is  consumed  there,  so  that  the  Combination's  proportion  of  the 
domestic  trade  in  these  products  corresponds  substantially  to  its 
proportion  of  the  entire  output  In  the  case  of  cigarettes  ap- 
proximately one  third  of  the  number  made  is  exported.  The 
Combination  has  practically  the  entire  export  trade,  from  which 
it  follows  that  its  proportion  of  the  production  for  dom.estic  con- 
sumption is  somewhat  less  than  appears  in  the  above  table,  being 
74.5  per  cent  in  1906. 

CONXLUSION 

These  facts  [Ten  pages  of  detail  omitted.]  emphasize  the  con- 
clusion already  drawn  from  the  history  of  the  organization  of 
the  Tobacco  Combination,  that  its  primary  object  has  been  to 


298  trusts;  pools  and  corporations 

secure  a  dominant  position  in  the  tobacco  business  of  the  United 
States  with  the  result  that  it  has  a  nearly  complete  control  of 
it,  save  only  in  the  manufacture  of  cigars. 

The  combination  has  superior  advantages  over  competitors, 
from  the  great  size  of  its  plants  and  from  the  control  of  more 
efficient  machinery.  These  advantages,  however,  have  not  been 
sufficient  to  enable  it,  while  charging  high  prices  for  the  greater 
part  of  its  product,  to  increase  its  degree  of  control,  particularly 
in  view  of  the  fact  that  many  consumers  prefer  to  patronize 
independent  concerns.  Despite  enormous  expenditures  for  ad- 
vertising and  in  "schemes"  and  despite  frequent  price  cutting 
by  means  of  its  so-called  "  fighting  brands  "  and  its  bogus  inde- 
pendent concerns,  there  has  been,  in  several  branches  of  the 
industry,  a  constant  tendency  for  competitors  to  gain  business 
more  rapidly  than  the  combination  and  thus  to  reduce  its  pro- 
portion of  the  output.  This  tendency  has  been  overcome  only 
by  continued  buying  up  of  competitive  concerns.  Many  weaker 
concerns  have  been  virtually  driven  out  of  business  or  forced  to 
sell  out  to  the  combination,  either  by  reason  of  the  direct  com- 
petition of  the  latter,  or  as  an  indirect  result  of  the  vigorous 
competition  between  the  combination  and  larger  independent 
concerns.  In  the  case  of  the  larger  and  more  powerful  concerns 
which  it  acquired,  however,  the  combination  has  usually  secured 
control  only  by  paying  a  high  price.  The  immense  profits  of 
the  combination  have  enabled  it  to  keep  up  this  policy. 


HISTORY    OF   THE    FOREIGN    INTERESTS    OF   THE   TOBACCO 

COMBINATION  1 

Early  History 

From  the  time  of  the  original  formation  of  the  American 
Tobacco  Company  in  1890  it  had  a  considerable  foreign 
business.  For  a  few  years  this  business  consisted  chiefly  of 
cigarettes,  and  was  handled  directly  by  the  American  Tobacco 
Company  itself.     As  early  as  1894,  however,  several  subsidiary 

1  Report  U.  S.  Bureau  of  Corporations,  on  the  Tobacco  Industry,  vol.  I,  Feb.  15, 
1909,  pp.  165-176. 


THE   TOBACCO    MONOPOLY  299 

companies  had  been  organized  in  Australia  (see  p.  70),  and 
in  the  following  year  several  Canadian  concerns  were^mbined 
in  the  American  Tobacco  Company  of  Canada.  (See  p.  70.) 
No  other  important  subsidiary  corporations  were  organized  or 
acquired  in  foreign  countries  until  1899.  In  that  year,  as  already 
related  (see  p.  83),  the  American  Tobacco  Company  acquired  a 
controlling  interest  in  a  large  cigarette-manufacturing  business  in 
Japan.  Two  years  later  the  interests  of  the  company  in  foreign 
corporations  were  extended  by  the  purchase  of  two  thirds  of  the 
capital  stock  of  the  George  A.  Jasmatzi  Company  (Limited),  of 
Dresden,  Germany.     (See  p.  88.) 

No  exact  figures  are  available  as  to  the  output  of  the  above- 
mentioned  foreign  concerns,  but  in  1901  President  Duke  esti- 
mated the  output  of  the  Canadian  concerns  at  about  100,000,000 
cigarettes  annually  and  that  of  the  Australian  factories  at  about 
200,000,000  a  year.  He  said  at  the  same  time  that  the  daily 
production  of  the  Japanese  company  was  8,000,000  cigarettes. 
It  was  reported  in  the  Commercial  and  Financial  Chronicle  that 
the  daily  production  of  the  German  company  was  3,000,000 
cigarettes,  which  would  amount  to  over  900,000,000  annually. 

In  addition  to  the  foreign  business  handled  through  the 
ownership  of  a  controlling  interest  in  these  foreign  factories,  the 
American  Tobacco  Company  was  the  principal  exporter  of 
cigarettes  from  the  United  States.  Its  exports  during  its  first 
year  in  business  amounted  to  only  262,681,500  cigarettes,  but 
they  increased  steadily  and  rapidly  until  the  year  1898,  when 
they  amounted  to  1,215,632,000.  In  1890  this  export  business 
was  a  little  over  one  tenth  of  the  entire  cigarette  output  of  the 
American  Tobacco  Company,  and  in  1898  very  nearly  one  third. 
During  this  period  the  exports  of  cigarettes  from  the  United 
States  by  all  other  manufacturers  combined  were  much  less  than 
those  of  the  American. 

Competitive  Campaign  of  the  American  Tobacco  Company 

IN  England 

Declining  Profits  on  Exports  to  England.  —  In  addition  to  the 
subsidiary  manufacturing  corporations  referred  to  above,  com- 


30O  TRUSTS.    POOLS   AND    CORPOR-\TIONS 

panics  and  agencies  which  operated  simply  as  selling  or  distrib- 
uting concerns  were  established  in  various  countries.  One  of 
the  most  important  of  these  was  the  London  depot  of  the 
American  Tobacco  Company.  In  1898  the  sales  of  this  depot 
amounted  to  8916,729.93,  but  as  the  total  expenses  of  the  depot, 
including  cost  of  goods,  were  $916,732.07  the  enterprise  was  by 
no  means  as  satisfactory  as  might  have  been  desired.  From 
that  year  the  sales  of  the  depot  declined  in  amount,  and  by 
1900,  the  last  full  year  of  its  operation,  they  were  only 
3591,897.36.  The  cost  of  goods  and  the  expenditures  of  the 
agency  had  not  declined  in  like  proportion,  for  they  amounted 
to  3646,835.99,  showing  a  loss  on  the  year's  business  of  over 
350,000.  The  American  Tobacco  Company  ascribed  this  un- 
satisfactory condition  of  its  English  business  to  the  duties  on 
leaf  and  manufactured  tobacco  going  into  England,  which  were 
so  arranged  as  fo  give  a  considerable  degree  of  protection  to  the 
domestic  manufacturer.^  In  view  of  this  condition  the  officers 
and  managers  of  the  American  Tobacco  Company  decided  that 
it  was  necessary  to  acquire  or  establish  a  manufacturing  plant 
or  plants  in  England  if  their  business  was  to  meet  with  success 
in  that  country. 

Purchase  of  Ogdens  {Limited).  —  The  formation  of  the  Con- 
solidated Tobacco  Company  in  June,  1901,  provided  the  necessary 
means  for  carrying  out  the  plans  of  the  men  at  the  head  of  the 
Tobacco  combination  in  regard  to  the  acquisition  of  English 
plants.  The  entire  830,000,000  capital  stock  issued  by  the  Con- 
solidated Tobacco  Company  was  paid  in  in  cash  and  was  available 
in  the  form  of  loans  for  any  of  the  enterprises  undertaken  by  the 
American  and  Continental  tobacco  companies  or  the  American 
Cigar  Company.  Shortly  after  this  large  fund  of  new  capital 
became  available  President  James  B.  Duke,  together  with 
\V.  R.  Harris  and  C.  C.  Dula,  who  were  officers  of  the  Consoli- 
dated and  its  affiliated  companies,  went  to  England  for  the  pur- 
pose of  carrying  out  the  plan  for  establishing  a  large  English 
manufacturing  business.     They  at  once  began  negotiations  for 


1  See  Statement  of  James  B.  Duke  to  Industrial  Commission,  report  of  Commission, 
vol.  XIII,  p.  327. 


THE   TOBACCO    MONOPOLY 


301 


the  purchase  of  Ogden's  (Limited),  one  of  the  most  important 
tobacco  manufacturing  concerns  in  Great  Britain,  -before  the 
end  of  September,  1901,  they  had  acquired  substantially  the  whole 
outstanding  stock  of  the  company.  The  following  statement 
shows  the  number  of  the  outstanding  shares  and  the  percentage 
of  the  total  acquired  by  the  American  Tobacco  Company : 


Total 
Shares  of 
Company 

Issued 

ACQtHRED  BY   AjIERICAX 
TOBACCO  Co. 

Xumber 

Per  cent  of  total 
issue 

Debenture  shares 

Preference  shares 

Ordinary  shares 

60,000 
200,000 
350,000 

59,600 
199,250 
335:200 

99-3 
99.6 

95-8 

The  total  cost  of  the  shares  acquired  was  $5,347,888.87. 

About  this  time  the  British  Tobacco  Company  was  incorporated 
under  the  English  law  by  the  officers  of  the  American  Tobacco 
Company,  and  it  was  their  intention  that  it  should  become  a 
holding  company  for  the  interests  of  the  Tobacco  combination 
in  Great  Britain.  As  a  matter  of  fact,  however,  the  shares  in 
Ogden's  (Limited),  were  taken  over  directly  by  the  American 
Tobacco  Company,  and  on  December  31,  1901,  that  company 
still  held  the  nominal  outstanding  stock  of  the  British  Tobacco 
Company,  amounting  to  only  £1$.  Subsequent  events  pre- 
vented the  development  of  this  holding  company. 

Organization  of  the  Imperial  Tobacco  Company.  —  The  purchase 
of  Ogden's  (Limited)  caused  immediate  alarm  among  the  British 
manufacturers  of  cigarettes  and  tobaccos.  They  feared  the 
power  of  the  American  Tobacco  Company,  with  its  enormous 
business  and  resources.  The  American  scarcely  had  time  to 
show  its  policy  in  the  management  of  the  Ogden's  concern  be- 
fore the  other  leading  manufacturers  of  tobacco  in  Great  Britain 
had  formed  a  combination  to  resist  this  dangerous  rival. 

Thirteen  of  the  largest  manufacturers  in  Great  Britain  com- 
bined to  form  the  Imperial  Tobacco  Company  (of  Great  Britain 
and  Ireland)  (Limited).     This  company,  which  was  registered 


302 


TRUSTS,    POOLS   AND    CORPORATIONS 


December  lo,  1901,  amalgamated  the  tobacco  business  of  the 
following  firms :  W.  D.  &  H.  O.  Wills,  Edwards,  Ringer  &  Bigg, 
and  Franklyn,  Davey  &  Co.,  of  Bristol ;  Lambert  &  Butler, 
Hignett's  Tobacco  Company,  and  Adkin  &  Sons,  of  London  ; 
John  Player  and  Sons,  Nottingham ;  Hignett  Bros.  &  Co., 
William  Clarke  &  Son,  and  Richmond  Cavendish  Company,  of 
Liverpool,  and  Stephen  Mitchell  &  Son,  F.  &  J.  Smith,  and  D. 
&  J.  MacDonald  of  Glasgow.  Preliminary  agreements  for  the 
formation  of  this  combination,  which  had  been  made  on  October 
3  and  10,  1 90 1,  were  ratified  by  the  company  on  February  3, 
1902.  The  authorized  capital  was  ;!^  15,000,000,  with  additional 
debenture  stock,  limited  in  amount  to  50  per  cent  of  the  cumu- 
lative preference  shares  for  the  time  being  issued,  the  total 
limit  being  ^2,500,000.  Thus  the  authorized  share  and  loan 
capital  together  was  ^17,500,000.     This  was  divided  as  follows  : 

4^  per  cent  debenture  stock ;^2, 500,000 

5^  per  cent  cumulative  preference  shares 5,000,000 

6  per  cent  noncumulative  preferred  ordinary  shares     .      .  5,000,000 

Deferred  ordinary  shares        5,000,000 

Total  capital ;,{^  17,500,000 

The  total  capital  stock,  the  amount  of  each  kind  of  stock 
issued,  and  the  amounts  issued  to  the  vendors  and  to  the  public 
are  shown  in  the  table  below : 


To  Vendors 

To  THE  Public 

Total  Issue 

Unissued 

Debenture  stock      .... 
Cumulative  preference  shares 
Preferred  ordinary  shares 
Deferred  ordinary  shares . 

;,{^5  00,000 

1,500,000 

4,259,049 
4,259,048 

;^  1, 000.000 
3,000,000 

;^I, 500,000 
4,500,000 
4,259,049 
4,259,048 

;,{^  1, 000,000 
500,000 
740,951 
740,952 

Total 

^^10,518,097 

;,{^4,ooo,ooo 

;^i4,5i8,097 

^^2,981,903 

The  first  column  shows  that  the  stock  taken  by  the  members 
of  the  various  firms  which  combined  to  form  the  Imperial  To- 
bacco Company  amounted  to  ;^io,5 18,097.  They  also  received 
;^i,438,925  in  cash. 


THE   TOBACCO   MONOPOLY  303 

The  principal  items  of  the  assets  of  the  Imperial  Tobacco 
Company,  as  set  forth  in  its  first  balance  sheet,  were : 

Land,  buildings,  plant,  machinery,  stock,  etc.,  obtained 

from  combining  concerns £3A3^'925 

Cash,  obtained  as  working  capital  by  sale  of  stock  to  the 

public  (in  addition  to  cash  paid  venders)        ....  2,561,075 

Good  will 8,518,097 

Total        ^^14,518,097 

The  average  annual  profit  of  the  companies  combined  during 
the  preceding  three  years  was  certified  to  have  been  ;^  1,062, 922, 
after  allowing  for  depreciation.  This,  after  paying  interest  on 
debenture  stock  and  dividends  on  cumulative  preference  shares, 
would  equal  nearly  9  per  cent  on  both  issues  of  ordinary  stock. 

An  agreement  was  made  by  the  Imperial  Tobacco  Company 
early  in  its  career  (January,  1902)  with  Salmon  &  Gluckstein 
(Limited),  a  corporation  manufacturing  tobacco  and  also  con- 
trolling a  number  of  retail  stores  in  England.  Under  this 
agreement  the  existing  ^450,000  of  the  ordinary  shares  in  the 
latter  company  were  to  be  converted  into  10  per  cent  preference 
shares,  the  dividend  to  be  guaranteed  by  the  Imperial  Tobacco 
Company,  and  ;2^  100,000  in  ordinary  shares  were  to  be  created 
and  issued  and  to  be  subscribed  for  by  the  Imperial  Tobacco 
Company.  This  step  assured  the  Imperial  Tobacco  Company 
the  cooperation  of  the  largest  English  retail  house  in  its  campaign 
against  the  American  interests. 

The  Imperial  Tobacco  Company  immediately  began  a  cam- 
paign of  active  competition  to  check  and  frustrate  the  plans  of 
the  American  Tobacco  Company  for  strengthening  its  foothold 
in  Great  Britain.  In  March,  1902,  the  Imperial  offered  large 
bonuses  to  customers  who  would  undertake  not  to  sell  American 
goods  for  a  term  of  years.  The  American  Tobacco  Company, 
through  the  Ogden's  Company,  met  this  by  offering  to  its  British 
customers,  for  the  next  four  years,  its  whole  net  profits  on 
British  business,  and  ^^200,000  a  year  besides.  The  offer  was 
as  follows : 

Commencing  April  2,  1902,  we  will  for  the  next  four  years  dis- 
tribute to  such  of  our  customers  in  the  United  Kingdom  as  purchase 


304  TRUSTS,   POOLS  AND   CORPORATIONS 

direct  from  us  our  entire  net  profits  on  the  goods  sold  by  us  in  the 
United  Kingdom.  In  addition  to  the  above,  we  will,  commencing 
April  2,  1902,  for  the  next  four  years,  distribute  to  such  of  our 
customers  in  the  United  Kingdom  as  purchase  direct  from  us  the  sum 
of  ;^2 00,000  per  year.  The  distribution  of  net  profits  will  be  made 
as  soon  after  April  2,  1903,  and  annually  thereafter,  as  the  accounts 
can  be  audited,  and  will  be  in  proportion  to  the  purchases  made  dur- 
ing the  year.  The  distribution  as  to  the  ;^2oo,ooo  per  year  will  be 
made  every  three  months,  the  first  distribution  to  take  place  as  soon 
after  July  2,  1902,  as  accounts  can  be  audited,  and  will  be  in  pro- 
portion to  the  purchases  during  the  three-months  period.  To  par- 
ticipate in  this  offer  we  do  not  ask  you  to  boycott  the  goods  of  any 
other  manufacturer. 

This  offer  had  a  marked  effect  in  opening  the  British  trade 
to  American  competition.  As  a  countermove  the  Imperial 
Tobacco  Company  threatened  to  invade  the  American  market, 
and  in  the  summer  of  1902  it  was  reported  to  be  selecting  sites 
for  factories  in  this  country.  Before  any  definite  steps  were 
taken,  however,  to  carry  out  this  plan,  an  agreement  was  arrived 
at  between  the  two  great  rival  corporations  which  completely 
changed  their  position  toward  each  other. 

Agreement  with  the  Imperial  Tobacco  Company 

The  agreement  between  the  American  Tobacco  Company  in- 
terests and  the  Imperial  Tobacco  Company  was  made  on  Sep- 
tember 27,  1902,  about  a  year  after  the  purchase  of  Ogden's  by 
the  American  and  about  seven  months  after  the  complete 
establishment  of  the  Imperial.  The  agreement  was  embodied 
in  two  documents.  The  first  related  to  the  trade  in  the  United 
Kingdom  and  the  United  States,  providing  for  the  transfer  of 
Ogden's  to  the  Imperial  and  for  division  of  territory  between 
the  Imperial  and  the  American.  The  second  provided  for  the 
estabhshment  of  a  new  corporation,  to  be  jointly  controlled  by 
the  American  and  the  Imperial,  which  was  to  do  business  in 
countries  outside  of  the  United  Kingdom  and  the  United  States. 

The  former  agreement  was  executed  by  .Ogden's  (Limited), 
the  American  Tobacco  Company,  Continental  Tobacco  Com- 
pany, American  Cigar  Company,  Consolidated  Tobacco  Com- 


THE   TOBACCO    MONOPOLY  305 

pany,  and  the  British  Tobacco  Company  (Limited),  on  the  one 
hand,  and  the  Imperial  Tobacco  Company  on  the  other.  By  it, 
Ogden's  (Limited)  agreed  to  convey  to  the  Imperial  company 
its  whole  undertaking  clear  of  incumbrances,  except  its  export 
business,  and  except  its  cash  and  book  accounts.  The  plant, 
including  land  and  buildings,  machinery,  tools,  and  live  stock, 
was  to  be  taken  at  the  valuation  at  which  it  then  stood  on  the 
books  of  the  Ogden's  Company ;  stock  in  trade  and  materials 
were  to  be  taken  at  cost ;  and  the  Ogden's  Company  was  to 
receive  ^{^  1,500,000  for  its  good  will,  patents,  and  trade-marks 
in  ordinary  shares,  half  preferred  (6  per  cent  noncumulative) 
and  half  deferred,  of  the  Imperial  company.  For  the  tangible 
assets  one  third  was  to  be  paid  in  preference  shares  (5^  cumu- 
lative) of  the  Imperial,  one  third  in  its  debenture  stock  (4^  per 
cent)  and  one  third  in  cash  ;  but  if  the  one  third  should  exceed 
;^300,ooo,  the  Imperial  company  was  not  required  to  pay  more 
than  that  amount  in  preference  shares,  but  might  pay  half  the 
excess  in  additional  debenture  stock  and  half  in  additional  cash. 
Indirectly  these  various  payments  came  chiefly  to  the  American 
Tobacco  Company  as  the  chief  holder  of  the  Ogden's  stock. 
(See  pp.  omitted.) 

The  Imperial  Tobacco  Company  agreed  not  to  engage  in  the 
tobacco  business  in  the  United  States,  unless  through  or  in  con- 
nection with  the  American  company  and  its  aUies,  except  that 
it  retained  the  right  to  buy  and  treat  tobacco  leaf  in  the  United 
States  for  the  purposes  of  its  business  in  the  United  Kingdom. 
All  the  companies  affiliated  with  the  American  Tobacco  Com- 
pany, parties  to  the  agreement,  bound  themselves  in  Hke  manner 
not  to  carry  on  the  tobacco  business  in  the  United  Kingdom, 
and  they  added  the  following : 

The  said  covenanting  parties  will  procure  the  following  directors 
of  some  or  one  of  them,  namely,  James  Buchanan  Duke,  Benjamin 
Newton  Duke,  Thomas  Fortune  Ryan,  John  Blackwell  Cobb,  WilHam- 
son  Whitehead  Fuller,  William  Rees  Harris,  Percival  Smith  Hill,  and 
Caleb  Gushing  Dula,  and  will  respectively  use  their  best  endeavors  to 
procure  such  other  directors  as  shall  be  required  by  the  Imperial 
company  to  enter  into  a  covenant  with  the  Imperial  company  similar 
to  that  referred  to  in  the  preceding  part  of  this  clause. 


3o6  TRUSTS,   POOLS  AND   CORPORATIONS 

By  a  parallel  clause,  certain  directors  of  the  Imperial  Com- 
pany were  excluded  from  the  tobacco  business  in  the  United 
States. 

Neither  the  Imperial  company  nor  Salmon  &  Gluckstein 
(Limited)  was  to  "sell  or  consign  any  tobacco  products  to  any 
person,  firm,  or  company  within  the  United  States  except  the 
American  company  or  persons  or  companies  designated  by  it "  ; 
and  the  several  American  companies  were  not  to  "  sell  or  consign 
any  tobacco  products  to  any  person,  firm,  or  company  in  the 
United  Kingdom  except  the  Imperial  company  or  persons  or 
companies  designated  by  it."  Goods  sold  by  one  company  to 
another  under  this  clause  were  to  be  paid  for  at  cost  plus  lo  per 
cent.  The  Imperial  company  was  to  be  appointed  sole  agent 
within  the  United  Kingdom  for  Havana  and  Porto  Rican  cigars 
and  cigarettes  controlled  by  the  American  companies,  and  the 
Imperial  company  was  not  to  handle  any  other  Havana  or  Porto 
Rican  cigars  or  cigarettes;  and  on  these  goods  the  Imperial 
company  was  to  have  a  commission  of  7|  per  cent.  The  Im- 
perial company  was  to  use  its  best  endeavors  to  promote  the 
sale  of  such  cigars  and  cigarettes  in  the  United  Kingdom,  and 
the  American  company  might  not  call  its  endeavors  in  question 
so  long  as  it  maintained  a  sale  of  the  Havana  cigars  and 
cigarettes  included  in  the  agency  equal  to  not  less  than  72  per 
cent  of  the  total  annual  importations  into  the  United  Kingdom, 
duty  paid,  of  cigars  and  cigarettes  made  in  Cuba,  the  percentage 
being  based  on  an  average  of  three  years.  This  percentage  was 
fixed  on  the  assumption  that  the  American  companies  "  control 
or  will  shortly  control  not  less  than  80  per  cent  of  the  aforesaid 
annual  importation."  This  part  of  the  agreement  was  subse- 
quently modified. 

As  a  means  of  maintaining  the  harmony  of  interests  between 
the  British  and  American  concerns,  it  was  provided  that  the 
allottees  of  the  ;^  1,500,000  in  ordinary  shares  of  the  Imperial 
company,  issued  in  payment  for  the  good  will  and  trade-marks 
of  Ogden's  (Limited)  —  that  is,  the  American  Tobacco  Company 
interests  —  should  not  "sell  or  transfer  more  than  10  per  cent  of 
the  said  shares  within  the  period  of  five  years  from  the  date  of 
their  allotment,  if  and  so  long  as  the  present  directors  of  the 


THE   TOBACCO    MONOPOLY  307 

Imperial  company,  or  some  of  them,  shall  hold  not  less  than 
^3,000,000  in  ordinary  shares  of  the  Imperial  company." 

This  agreement  for  exclusive  territory  is  still  in  full  effect  and 
is  strictly  observed. 

Present  Capitalization  and  Business  of  the  Imperial  Tobacco 
Company.  —  At  the  time  when  the  Ogden's  purchase  was  made 
by  the  Imperial,  in  1902,  the  Imperial  increased  its  authorized 
capital  from  ^15,000,000  to  ;^i8,ooo,ooo,  namely,  ^6,000,000 
in  preference  shares,  ^6,000,000  in  preferred  ordinary  shares, 
and  ;^6,ooo,ooo  in  deferred  ordinary  shares.  By  no  means  all 
this  stock,  however,  was  issued  at  the  time  or  has  since  been  issued. 
At  the  beginning  of  1907  the  outstanding  capital  stock  of  the 
Imperial,  together  with  its  issue  of  debentures,  was  as  follows : 

Preference  shares /i{^4i959>249 

Preferred  ordinary  shares 5,260,469 

Deferred  ordinary  shares        5>27°)436 

Debentures          2,065,011 

Total •.     .  ;^i7.5S5'i65 

It  will  be  observed  that  the  compromise  agreement  above  de- 
scribed specifically  reserved  to  the  Imperial  Tobacco  Company 
the  right  to  buy  and  treat  leaf  tobacco  in  the  United  States  for 
the  purpose  of  its  business,  though  it  was  prohibited  from  manu- 
facturing finished  tobacco  products  in  this  country.  The  Im- 
perial accordingly  maintains  its  own  leaf-buying  organization  in 
the  United  States,  most  of  its  raw  material  coming  from  this 
country.  It  has  incorporated  this  organization  under  the  name 
of  the  Imperial  Tobacco  Company,  of  Kentucky.  It  has  estab- 
lished its  own  stemmeries  throughout  the  tobacco  districts  of 
Virginia,  North  Carolina,  Kentucky,  and  Tennessee. 

One  result  of  the  compromise  with  the  British  interests  is  that 
several  well-known  brands  of  English  tobacco  which  were  formerly 
made  only  in  Great  Britain  are  now  made  also  in  the  United 
States  to  supply  the  trade  here,  and  thus  save  the  import  duty 
of  55  cents  per  pound.  They  bear  the  same  name  as  before  and 
have  the  same  appearance  in  every  respect,  but  in  small  type 
the  packages  indicate  the  fact  that  the  product  is  made  by  the 
American  Tobacco  Company  in  this  country.  There  is  of  course 
also  some  English  tobacco  made  by  the  Imperial  in  England, 


308  TRUSTS,   POOLS  AND   CORPORATIONS 

which  is  sold  through  the  American  Tobacco  Company  or  its 
subsidiaries  in  the  United  States. 

Profits  of  the  American  through  the  British  Campaign 

Aside  from  any  advantages  which  the  American  Tobacco 
Company  interests  secured  in  the  second  part  of  the  agreement 
—  that  is,  in  the  establishment  of  the  British-American  Tobacco 
Company,  as  described  below  —  the  transfer  of  Ogden's  to  the 
Imperial  represented  a  very  considerable  profit  to  the  American. 
The  American  had  paid  for  its  interests  in  Ogden's  (Limited) 
$5,347,888.87.  (See  p.  167.)  Aside  from  receiving  about 
$1,570,000,  or  approximately  their  original  cost,  for  its  holdings 
of  Ogden's  debentures  and  preference  shares,  the  American 
Tobacco  Company  became  a  large  holder  of  ordinary  shares  of 
the  Imperial  through  the  transfer  of  the  English  business  of 
Ogden's  to  the  Imperial.  As  already  stated,  ;^i, 500,000,  or 
nearly  $7,500,000,  was  paid  by  the  Imperial  for  the  good  will  of 
Ogden's  (Limited).  Most  of  this  came  to  the  American  Tobacco 
Company  as  the  principal  stockholder  of  Ogden's.  The  pay- 
ment was  made  in  the  form  of  750,000  £1  deferred  ordinary 
shares  and  750,000  £1  preferred  ordinary  shares  of  the  Im- 
perial. Of  this  stock,  10  per  cent  was  issued  to  the  Ameri- 
can Tobacco  Company  direct,  representing  compensation  to  it 
for  the  value  of  its  own  brands  which  had  been  transferred  to 
Ogden's  and  by  it  transferred  to  the  Imperial.  The  remaining 
675,000  shares  of  each  class  were  apportioned  among  the  holders 
of  the  ordinary  shares  of  Ogden's  (Limited);  the  American 
Tobacco  Company  and  its  affiliated  companies,  which  held 
;^335,200  out  of  ^350,000  of  such  ordinary  shares,  conse- 
quently received  ^^646,457  of  each  class  of  the  Imperial  shares 
for  its  proportion.  The  receipts  of  the  American  Tobacco 
Company  for  its  own  brands  and  business  and  for  its  interest 
in  Ogden's  thus  amounted  to  ;i^72 1,457  in  preferred  ordinary 
stock  and  an  equal  amount  in  deferred  ordinary  stock,  the  total 
par  value  of  these  shares  in  American  money  being  about 
$7,000,000.  This  same  stock  was  carried  on  the  books  of  the 
American  Tobacco  Company  after  the  merger  in  October,  1904. 


THE   TOBACCO    MONOPOLY  309 

At  the  end  of  1906  it  still  held  ;^72 1,457  of  the  deferred  ordi- 
nary shares,  but  its  holdings  of  the  preferred  or'^inary  had 
fallen  to  ^376,721,  large  blocks  having  been  sold.  At  the 
time  when  the  American  Tobacco  Company  held  721,457  shares 
each  of  both  the  deferred  and  the  preferred  ordinary  stock  of 
the  Imperial  its  proportion  of  the  total  issue  of  such  shares  was 
13.7  per  cent,  and  its  proportion  of  the  entire  share  capitaliza- 
tion about  8  per  cent.  By  December  31,  1906,  this  proportion 
had  fallen  to  about  6  per  cent. 

The  Imperial  Tobacco  Company  has  proved  very  successful, 
and  consequently  the  ordinary  shares  received  by  the  Ameri- 
can Tobacco  Company  in  exchange  for  the  good  will  of  Ogden's 
have  brought  a  good  return.  The  total  profits  of  the  Imperial 
were  approximately  ^1,100,000  in  1902,  ;^i, 260,000  in  1903, 
;^i,450,ooo  in  1904,  ^1,700,000  in  1905,  and  ;^i, 790,000  in 
1906.  The  deferred  ordinary  shares,  which  correspond  to  com- 
mon stock,  received  a  dividend  of  4  per  cent  in  1903,  6  per  cent 
in  1904,  8  per  cent  in  1905,  and  10  per  cent  in  1906.  It  would 
appear,  therefore,  that  the  securities  of  the  Imperial  obtained 
by  the  American  must  be  considered  to  have  been  worth  fully 
their  par  value. 

The  above  computation  shows  over  ^8,500,000  received  by 
the  American  Tobacco  Company  in  payment  on  its  interest  in 
Ogden's  (Limited).  While  this  is  about  ^3,000,000  in  excess 
of  the  amount  the  American  paid  for  Ogden's,  it  also  appar- 
ently received  shares  of  the  British-American  for  the  good  will 
of  the  export  business  of  Ogden's.  As  the  accounts  of  the 
American  Tobacco  Company  combine  these  shares  with  those 
received  for  its  own  export  business,  the  exact  amount  of  either 
payment  has  not  been  ascertained. 

Although  this  transaction  was  financially  profitable  to  the 
American  Tobacco  Company  interests,  there  is  little  doubt  that 
their  campaign  in  Great  Britain  fell  short  in  results  of  what  had 
been  anticipated.  The  American  Tobacco  men  had  apparently 
aspired  to  substantial  domination  in  the  British  market.  The 
actual  result  was  the  formation  of  a  powerful  combination  in 
Great  Britain  in  which  the  American  interests  held  only  a  small 
proportion  of  the  stock. 


310  TRUSTS,    POOLS   AND    CORPORATIONS 

The  agreement,  on  the  other  hand,  whereby  the  control  of 
the  foreign  business  of  the  Imperial  and  American  was  com- 
bined under  the  British-American  was  exceedingly  profitable 
to  the  American  Tobacco  Company.  In  the  four  years  of  com- 
plete operation  of  that  concern  (1904- 1907,  inclusive),  the 
American  received  more  than  $7,000,000  in  dividends,  while  the 
foreign  trade,  including  investments,  in  the  preceding  four 
years  yielded  less  than  ^2,000,000. 

History  of  the  British-American  Tobacco  Company 

As  already  stated,  the  second  agreement  of  September  27, 
1902,  between  the  Imperial  Tobacco  Company  and  the  Ameri- 
can Tobacco  Company  interests  provided  for  the  organization 
of  a  tobacco  corporation  to  do  business  outside  of  those  terri- 
tories specifically  reserved  to  the  Imperial  Tobacco  Company 
and  to  the  American  Tobacco  Company  and  its  associated  con- 
cerns, respectively ;  that  is  to  say,  practically  outside  of  the 
United  Kingdom  and  of  the  United  States  and  its  noncontigu- 
ous territories.  This  new  corporation  was  known  as  the  British- 
American  Tobacco  Company  (Limited).  (See  Exhibit  No.  2, 
p.  440.) 

The  agreement  providing  for  the  establishment  of  this  com- 
pany was  signed  by  the  Imperial  Tobacco  Company,  Ogden's 
(Limited),  the  American  Tobacco  Company,  Continental  To- 
bacco Company,  American  Cigar  Company,  Consolidated  To- 
bacco Company,  and  "  Williamson  Whitehead  Fuller  and  James 
Inskip,  on  behalf  of  a  company  intended  to  be  formed  under 
the  companies'  acts,  1862  to  1900,  with  the  name  of  'British- 
American  Tobacco  Company  (Limited).'  " 

The  British-American  Company  was  to  buy  the  export  busi- 
ness of  the  other  signatories  "  and  the  good  will  appertaining 
thereto,  to  include  formulae  and  recipes  of  preparation,  treat- 
ment, and  manufacture,  as  well  as  license  to  use  patent  rights, 
trade-marks,  brands,  licenses,  and  other  exclusive  rights  and 
privileges,  for  the  purposes  of  such  export  business,  and  shall 
also  include  all  stock  or  shares  in  companies  incorporated  in 
countries    foreign    to    the    United    Kingdom    and    the    United 


THE   TOBACCO    MONOPOLY  31 1 

States,  .  .  .  including  all  shares  of  the  American  Company  in 
Georg  A.  Jasmatzi  Company  (of  Dresden),  and  air^shares  of 
the  Imperial  Company  in  W.  D.  &  H.  O.  Wills  (Australia) 
(Limited)."  The  words  "United  Kingdom"  were  defined  to 
mean,  for  the  purposes  of  the  agreement,  Great  Britain  and  Ire- 
land and  the  Isle  of  Man,  and  the  words  "  United  States  "  to 
mean  "  the  United  States  of  America  as  now  constituted,  Cuba, 
Porto  Rico,  the  Hawaiian  Islands,  and  the  Philippine  Islands." 
The  words  "  export  business  "  were  defined  to  mean  : 

The  manufacture  of  and  dealing  in  tobacco  and  its  products  in  any 
country  or  place  outside  the  United  Kingdom  and  the  United  States, 
and  the  manufacture  of  and  dealing  in  tobacco  and  its  products 
within  the  United  Kingdom  for  export  to  any  other  country  except 
the  United  States,  and  the  manufacture  of  and  dealing  in  tobacco  and 
its  products  in  the  United  States  (except  in  Cuba,  Porto  Rico,  the 
Hawaiian  Islands,  and  the  Philippine  Islands),  for  the  purpose  of 
export  to  any  other  country  except  the  United  Kingdom,  and  the 
manufacture  and  selling  in  the  United  Kingdom  and  the  United 
States,  respectively,  of  tobacco  to  be  supplied  to  ships  in  port  for  the 
purposes  of  ships'  stores. 

For  the  whole  export  business,  rights,  and  shares  in  other 
companies,  to  be  thus  acquired,  the  British-American  company 
was  to  issue  p^2, 820,000  in  its  ordinary  shares.  One  third  of 
this,  or  ^940,000,  was  to  go  to  the  Imperial  company,  and  two 
thirds,  or  ;!^i, 880,000,  to  "the  Ogden  company,  the  American 
company,  the  Continental  company,  the  Cigar  company,  and  the 
Consolidated  company,  or  some  of  them,  in  such  proportions  as 
they  shall  mutually  agree."  In  addition  to  the  shares  thus 
issued,  the  Imperial  company  was  to  take  a  further  amount  of 
;^300,ooo,  and  the  American  companies  a  further  amount  of 
;^6oo,ooo,  in  the  ordinary  stock  of  the  British-American,  which 
they  were  to  pay  for  in  cash.  The  p^2, 820,000  stock  issued  for 
the  "  export  business  "  was  given  for  good  will  and  other  in- 
tangible assets;  it  did  not  include  the  export  factories  nor  stock 
in  trade.  These  were  to  be  separately  paid  for  in  cash  (out 
of  the  proceeds  of  the  cash  stock  subscription),  the  factories 
and  equipment  at  the  values  at  which  they  stood  on  the  books 
of  the  vendors  and  the  stock  in  trade  and  materials  at  cost. 


312  TRUSTS,   POOLS  AND   CORPORATIONS 

The  British-American  company  agreed  not  to  engage  in  "  the 
business  of  a  tobacco  manufacturer,  or  in  any  dealing  in  tobacco 
or  its  products,  except  in  the  manner  and  within  the  limits  con- 
templated and  authorized  by  this  agreement,"  and  each  of  the 
other  companies  agreed  not  to  engage  in  export  business,  as 
defined  in  the  agreement,  except  as  it  might  be  interested  as  a 
member  of  the  British-American  company  or  of  a  company 
formed  with  its  concurrence,  and  also  except  so  far  as  the  Amer- 
ican companies  might  be  interested  as  members  of  companies 
or  firms  engaged  in  exporting  cigars  and  cigarettes  from  Cuba, 
Porto  Rico,  the  Hawaiian  Islands,  and  the  Philippine  Islands. 

In  pursuance  of  this  agreement  the  British-American  Tobacco 
Company  was  incorporated  under  the  laws  of  Great  Britain. 
Its  authorized  capital  is  ^6,000,000,  ^1,500,000  in  5  per  cent 
cumulative  preference  shares  and  ^4,500,000  in  ordinary 
shares.  Only  ordinary  shares  were  at  first  issued.  The  amount 
issued  in  pursuance  of  the  terms  of  the  agreement,  as  above 
set  forth,  was  /^3,720,02i,  which  was  still  the  amount  of 
ordinary  shares  outstanding  at  the  end  of  1906.  Of  this,  as 
provided  by  the  agreement,  two  thirds  went  to  the  American 
Tobacco  Company  and  its  affiliated  concerns  and  the  remainder 
to  the  Imperial  Tobacco  Company.  At  the  time  of  the  con- 
solidation of  the  American,  Continental,  and  Consolidated 
companies,  in  1904,  the  entire  amount  of  ordinary  shares  of 
the  British-American  which  had  been  acquired  by  them, 
^2,480,012  ($12,052,858.32),  was  transferred  to  the  reorgan- 
ized American  Tobacco  Company.  In  1906  the  American 
Tobacco  Company  sold  105,333  shares  of  this  stock,  its  hold- 
ings at  the  end  of  that  year  amounting  to  ^2,447,995  ($11,- 
897,255.29). 

Some  time  after  the  issue  of  the  ordinary  shares  the  entire 
authorized  amount  of  preference  shares,  ;^  1,500,000,  was  issued 
by  the  British-American  company,  precisely  two  thirds  being 
subscribed  by  the  American  Tobacco  Company  interests  and 
the  remainder  by  the  Imperial.  The  same  1,000,000  shares  of 
preference  stock  obtained  at  this  time  are  still  held  by  the 
American  Tobacco  Company,  the  par  value  in  American  cur- 
rency being  $4,860,000.     These  preference  shares  were  paid  for 


THE  TOBACCO   MONOPOLY  313 

in  cash  and  the  proceeds  used  for  developing  the  business  of 
the  British-American. 

The  total  issued  capital  of  the  British-American  at  the  end  of 
1906  was,  therefore,  ;;{;5, 220,021  ($25,369,302.06),  of  which 
nearly  two  thirds  was  held  by  the  American  Tobacco  Company. 

The  British-American  Tobacco  Company  has  very  consider- 
ably extended  the  already  large  export  business  which  was 
turned  over  to  it  by  the  American  and  Imperial  companies. 
(See  p.  305.)  It  manufactures  large  amounts  of  tobacco  in  the 
United  States  for  export,  and  it  also  manufactures  some  in 
foreign  countries.  To  a  very  large  extent  it  acts  as  a  wholesale 
distributor  of  its  own  products  and,  to  some  extent,  of  products 
purchased  from  other  concerns,  particularly  from  the  Imperial 
and  from  the  American  Tobacco  Company  and  its  subsidiary 
concerns.  The  business  of  the  British-American  Tobacco  Com- 
pany is  in  part  carried  on  in  its  own  name  and  in  part  by  means 
of  subsidiary  companies.  Aside  from  the  subsidiary  companies 
in  several  foreign  countries,  whose  stocks  were  turned  over 
to  the  British-American  by  the  American  and  Imperial  interests, 
it  has  acquired  stocks  in  a  large  number  of  other  concerns, 
both  in  the  United  States  and  foreign  countries. 


PRICES,   COSTS,   AND    PROFITS  1 

The  principal  facts  shown  in  this  report  are  grouped  below 
under  three  heads  according  as  they  relate  to  the  combination, 
to  the  successor  companies,  or  to  other  companies. 

Combination 

The  combination  originated  in  1890  with  the  formation  of  the 
American  Tobacco  Company,  which,  through  the  expansion  of  its 
business  and  the  affihation  of  numerous  other  concerns,  acquired 

1  Report  of  U.  S.  Commissioner  of  Corporations  on  the  Tobacco  Industry,  Part  III, 
pp.  1-29,  condensed  without  indicating  omissions.  This  report  deals  with  the  results 
under  combination  and  for  the  two  years,  1912-1913,  which  succeeded  dissolution 
by  the  Supreme  Court  decree  (Chapter  XVII,  infra). 


314 


TRUSTS,    POOLS    AND    CORPORATIONS 


a  dominating  position  in  the  tobacco  industry.  This  combina- 
tion was  dissolved  by  judicial  decree  in  191 1. 

The  salient  points  brought  out  in  this  part  of  the  report  rela- 
tive to  the  business  of  the  combination,  so  far  as  it  was  engaged 
in  the  manufacture  and  sale  of  tobacco  in  the  United  States,  are 
as  follows: 

(i)  That  the  combination  from  1902  to  19 10  had  a  monopo- 
listic position  in  each  of  the  chief  branches  of  the  tobacco  busi- 
ness, except  in  cigars,  the  minimum  proportion  of  the  annual 
output  in  the  several  branches  ranging  from  two  thirds  to  over 
five  sixths  of  the  total  output  of  the  country,  while  in  cigars  the 
maximum  proportion  in  any  year  was  only  one  sixth  of  the  total. 

The  combination's  proportions  of  the  annual  output,  by 
branches,  from    1902  to   1910  were: 


Year 

Plug 

Smoking 

Fine   Cut 

Snuff 

Cigar- 
ettes 

Little 
Cigars 

Cigars 

Per  cent 

Per  cent 

Per  cent 

Per  cent 

Per  cent 

Per  cent 

Per  cent 

1902       .      .      .      . 

71.2 

66.3 

73-7 

85.9 

84.6 

71.8 

14-3 

1903 

76.9 

67.1 

77.6 

89.4 

83-9 

67.9 

16.4 

1904 

78.2 

69.2 

80.4 

90.6 

87.7 

79.2 

139 

1905 

80.7 

68.7 

81.7 

93-8 

84.7 

78-3 

133 

1906 

81.8 

70.6 

80.9 

96.0 

82.5 

81.3 

14.7 

1907 

80.5 

72.4 

81.4 

95-7 

81.7 

90.8 

14-5 

1908 

81.9 

73-6 

79.2 

95-7 

81.8 

88.7 

13.0 

1909 

83-3 

75-3 

80.1 

96.1 

83.6 

89.0 

131 

19IO 

84.9 

76.2 

79-7 

96.5 

86.1 

91.4 

14.4 

(2)  That  for  the  combination  high  rates  of  profit  have  followed 
monopolistic  control,  the  greater  the  degree  of  control  the 
greater  the  rate. 

Thus,  in  the  plug  branch  from  1893  to  1898  the  combination 
lost  an  average  of  3  cents  per  pound  of  plug  tobacco  sold.  Its 
output  during  this  period  was  less  than  25  per  cent  of  the  total 
output  of  the  United  States.  By  1900,  however,  it  had  secured 
62  per  cent  of  the  output  and  in  this  year  its  profit  was  3.8 
cents  per  pound,  and  by  1905  it  had  secured  control  of  over  80 
per  cent  of  the  country's  output  and  its  profit  was  nearly  8  cents 
per  pound. 


THE   TOBACCO    MONOPOLY  3^5 

In  the  smoking  branch  the  combination's  control  from  1893 
to  1898  was  less  than  25  per  cent  of  the  total  out^  of  the 
United  States,  and  its  profits  averaged  about  4  cents  per  pound. 
From  1902  to  1910  when  the  control  of  the  combination  was 
from  66  to  ^6  per  cent  its  profits  were  approximately  7  cents 
per  pound. 

In  the  fine-cut  branch  from  1899  to  1901  the  combination's 
control  of  the  total  output  was  less  than  50  per  cent.  In  two 
of  these  years  it  sold  its  fine-cut  product  at  a  loss.  On  the  other 
hand,  from  1902  to  1910  its  control  was  nearly  80  per  cent  and 
its  profit  per  pound  ranged  from  3.9  cents  to  y.^  cents. 

In  the  snuff  branch  the  combination  had  practically  a  com- 
plete control  after  1903,  and  in  no  other  branch  were  the  profits 
as  large  or  the  variations  from  year  to  year  as  small. 

In  the  cigarette  branch  the-  combination  had  practically  a 
complete  control  from  the  organization  of  the  American  To- 
bacco Co.  in  1890.  In  this  branch  the  rates  of  profit  were  also 
high,  particularly  during  the  earlier  years  of  the  combination's 
existence.  The  gradual  decrease  in  the  profits  in  the  cigarette 
branch,  without  any  marked  decline  in  its  proportion  of  the  total 
output,  was  due  in  part  to  the  fact  that  it  was  necessary  in  order 
to  hold  its  position  to  shift  during  the  latter  part  of  the  period 
to  newer  brands  which,  on  account  of  the  expense  of  exploitation, 
afforded  a  lower  rate  of  return. 

In  the  cigar  branch  the  combination  never  acquired  any  large 
proportion  of  the  business,  and  the  comparative  unprofitableness 
of  this  branch  stands  in  sharp  contrast  with  the  profitableness 
of  the  manufactured  tobacco,  snuff,  and  cigarette  branches  in 
which  it  had  a  high  degree  of  control. 

It  is  evident,  therefore,  that  the  high  rates  of  profit  shown  for 
the  combination  in  those  branches  in  which  it  had  a  high  degree 
of  control  were  in  great  measure  due  to  monopoHstic  power. 

(3)  That  for  most  types  of  manufactured  tobacco  the  combi- 
nation's rates  of  profit  were  ordinarily  more  than  double  those 
of  its  competitors,  though  for  a  few  types  it  had  no  advantage. 

******** 

(4)  That  selling  costs  were  materially  reduced  as  the  volume 
of  the  combination's  business  increased. 


3i6  TRUSTS,    POOLS   AND   CORPORATIONS 

(5)  That  generally  there  were  material  decreases  in  advertis- 
ing expenditures  of  the  combination  after  a  controlling  propor- 
tion of  the  total  production  had  been  secured. 

(6)  That  there  was  a  large  advance  in  the  cost  of  leaf  tobacco 
for  the  combination  from  1901  to  19 10. 

(7)  That  during  1901  and  1902  the  internal-revenue  tax  was 
reduced  6  cents  per  pound  on  manufactured  tobacco,  42  cents 
per  thousand  on  cigarettes,  and  46  cents  per  thousand  on  little 
cigars,  but  the  combination  made  practically  no  change  in  the 
prices  to  the  jobber,  while  the  prices  to  the  consumer  also  re- 
mained unchanged,  so  that  the  combination  profited  by  substan- 
tially the  whole  extent  of  the  tax  reduction,  though  it  was 
presumably  intended  for  the  benefit  of  the  consumer.^ 

When  the  rate  of  internal-revenue  tax  on  tobacco  products  is 
increased,  one  method  of  adjustment  is  to  reduce  the  sizes  of 
the  package  in  which  tobacco  is  permitted  to  be  packed.  This 
is  for  the  purpose  of  enabling  the  manufacturer  to  change  the 
sizes  of  the  packages  sold  at  customary  retail  prices,  and  in  this 
way  to  shift  the  tax  increase  to  the  consumer.  Thus,  in  1898 
when  the  tax  on  manufactured  tobacco  was  increased  from  6  cents 
to  12  cents  per  pound,  the  statutory  sizes  of  package  in  which 
most  of  the  tobacco  was  packed,  namely.  2  ounces,  3  ounces, 
and  4  ounces,  were  abolished,  and  if  ounce,  2^  ounce,  and  3^ 
ounce  sizes  substituted. 

In  1 901,  when  the  tax  was  reduced  2.4  cents  per  pound,  the 
statutory  packages  of  2  ounces,  3  ounces,  and  4  ounces,  which 
had  been  in  vogue  prior  to  1898,  were  again  permitted  to  be 
used,  but  the  tax  reduction  at  this  time  was  not  sufficient  to 
enable  the  combination  to  supply  these  larger  sizes  (if  the 
dealers  sold  at  the  customary  prices  and  on  their  usual  margins 
of  profit)  without  greatly  reducing  its  own  profits.  The  whole- 
sale and  retail  prices  were  not  changed,  therefore,  and  the  com- 
bination got  the  advantage  from  this  reduction  in  tax.  In  1902 
the  tax  was  again  reduced  3.6  cents  per  pound,  but  there  was 
no  change  in  the  statutory  sizes.  The  packages  of  i§  ounces, 
2.1  ounces,  and  3^^  ounces  in  which  the  bulk  of  the  tobacco  was 

1  Cf.  Chapter  11,  supra,  on  whisky. 


THE   TOBACCO   MONOPOLY  317 

then  packed  were  not  abolished,  but  the  combination  instead  of 
returning  to  the  old  larger  sizes  and  thus  reducing  its*prices  per 
pound,  which  this  second  tax  reduction  would  have  made  feasi- 
ble, continued  to  supply  these  smaller  sizes  at  the  prices  already- 
current.  It  profited,  therefore,  by  substantially  the  whole  extent 
of  both  tax  reductions,  though  Congress  presumably  intended 
the  reductions  for  the  benefit  of  the  consumer.  Similar  condi- 
tions existed  with  respect  to  the  tax  reductions  on  cigarettes  and 
little  cigars. 

(8)  That  in  19 10  when  the  internal-revenue  tax  on  manufac- 
tured tobacco  was  increased  from  6  cents  to  8  cents  per  pound, 
on  cigarettes  from  ^1.08  to  $1.25  per  thousand,  and  on  little 
cigars  from  $0.54  to  $0.75  per  thousand,  the  prices  of  certain 
products  of  the  combination  were  increased  as  much  as  the  tax 
both  to  the  jobber  and  the  consumer,  so  that  the  burden  was 
shifted  to  the  consumer ;  while  for  other  products  the  prices  to 
jobbers  and  consumers  were  not  increased,  so  that  the  burden 
rested  on  the  combination. 

In  general,  prices  were  increased  both  to  the  jobber  and  to 
the  consumer  on  brands  of  smoking  and  fine-cut  tobaccos,  but 
no  changes  were  made  in  prices  to  the  consumer  on  plug,  snuff, 
cigarettes,  or  little  cigars,  and  only  small  increases  were  made 
in  prices  to  the  jobber. 

The  increase  in  the  tax  rate  per  pound  was  generally  a  small 
part  of  the  profit  on  the  more  successful  brands,  and  was  there- 
fore generally  borne  by  the  manufacturers.  If  they  had 
reduced  the  quantities  in  their  retail  packages  for  all  sizes,  they 
would  have  generally  more  than  doubled  their  profits,  and 
apparently  they  did  not  regard  this  as  advisable.  For  smoking 
and  fine  cut,  in  some  cases,  they  reduced  the  quantity  in  a 
package  sold  at  a  customary  retail  price,  and  in  other  cases 
made  no  change,  and  thus  increased  their  profits  on  some  sizes 
and  decreased  them  on  others.  Taking  all  kinds  of  tobacco 
products  together,  however,  the  tax  increase  in  1910  was  largely 
borne  by  the  combination. 

(9)  That  there  were  practically  no  changes  in  prices  to  the 
consumer  for  the  combination's  principal  brands  of  manufactured 
tobacco,  cigarettes,  and  little  cigars  from  1901  to  July,  1910. 


3i8  TRUSTS,    POOLS   AND    CORPORATIONS 

(10)  That,  while  there  were  practically  no  changes  in  prices 
to  the  consumer  from  1901  to  July,  1910,  for  the  combination's 
principal  brands,  there  were  substantial  increases  in  prices  to 
jobbers,  thus  reducing  the  margins  between  these  prices. 

(11)  That  the  most  profitable  years  of  the  combination's 
existence  were  from  1903  to  1908  —  the  period  of  low  tax,  mod- 
erate leaf  costs,  decreased  advertising  expenditures,  and  highly 
monopolistic  control. 

(12)  That  the  combination  for  various  types  or  classes  of 
tobacco  products  developed  one  or  two  predominating  brands,  a 
policy  which  tended  to  promote  concentration  and  economy  in 
manufacture  and  afforded  a  greater  protection  against  competi- 
tion than  a  multiplicity  of  brands,  but  which  at  the  time  of 
dissolution  presented  difficulties  in  dividing  the  business. 

Successor  Companies 

By  the  term  "  successor  companies  "  is  meant  the  seven  com- 
panies that  succeeded,  under  the  decree  of  dissolution,  to  the 
domestic  tobacco  manufacturing  business  formerly  conducted 
by  the  combination.  The  companies  are  as  follows  :  The 
American  Tobacco  Co.,  the  Liggett  &  Myers  Tobacco  Co.,  the 
P.  Lorillard  Co.,  the  R.  J.  Reynolds  Tobacco  Co.,  the  Ameri- 
can Snuff  Co.,  the  Weyman-Bruton  Co.,  and  the  George  W. 
Helme  Co.  Certain  other  companies  were  established  by  the 
decree  which  succeeded  to  other  parts  of  the  business  of  the 
combination  not  discussed  in  this  report,  namely,  the  foreign 
business,  the  domestic  retail  business,  and  the  manufacture  of 
accessory  products. 

The  decree  of  dissolution  allowed  a  p7'o  rata  distribution  of 
the  shares  of  the  successor  companies  among  the  former  share- 
holders of  the  combination  and  extended  voting  rights  to  the 
holders  of  the  preferred  stock.  This  extension  of  voting  rights 
reduced  the  proportion  of  voting  stock  held  by  the  principal 
holders  thereof,  namely,  the  29  individual  defendants  in  the 
dissolution  suit,  from  about  56  per  cent  in  the  combination  to 
about  35  per  cent,  on  the  average,  in  the  successor  com- 
panies. 


THE   TOBACCO    MONOPOLY  319 

The  salient  points  brought  out  by  this  part  of  the  report  rela- 
tive to  the  business  of  the  successor  companies,  covering  the 
two-year  period  following  the  dissolution  of  the  combination 
(19 1 2  and  191 3),  are  as  follows  : 

(13)  That  the  several  successor  companies  estabhshed  in 
accordance  with  the  plan  of  dissolution  were  much  larger  pro- 
ducers of  tobacco  products  than  any  of  the  other  companies. 

(14)  That  a  comparison  of  the  successor  companies'  combined 
proportion  of  the  total  output  of  the  country  in  the  various 
branches  of  the  tobacco  business  in  19 13  with  those  of  the 
combination  in  1910  shows  that  the  combined  proportion  of  the 
successor  companies  was  less  in  smoking  and  in  fine  cut ;  more 
in  cigarettes  and  in  snuff,  and  about  the  same  in  plug  and  Httle 
cigars. 

(15)  That  in  most  branches  there  was  a  more  equal  distribu- 
tion of  business  among  the  successor  companies  in  1912  and  1913 
than  there  was  directly  after  the  dissolution. 

(16)  That,  although  there  were  no  important  changes  in 
prices,  the  results  for  certain  branches,  particularly  smoking 
and  cigarettes,  tend  to  show  competition  for  business  in  191 2  and 
191 3  and  an  effort  on  the  part  of  the  several  successor  com- 
panies to  fill  in  gaps  in  types  of  their  business  in  which  they 
were  weak,  though  for  certain  other  branches,  particularly  snuff, 
such  competition  has  not  been  apparent. 

(17)  That  in  the  snuff  branch  each  of  the  three  successor 
companies  has  practically  a  monopoly  in  its  respective  type  and 
to  a  large  extent  a  distinct  sales  territory ;  that  the  branch  is 
characterized  by  unusually  high  profits  and  small  advertising 
and  selling  costs. 

(18)  That  the  cost  of  leaf  tobacco  used  by  the  successor  com- 
panies in  19 1 2  and  191 3  in  the  plug,  fine-cut,  and  cigarette 
branches  was  less,  while  in  the  smoking,  snuff,  and  little-cigar 
branches  it  was  more,  than  the  cost  of  that  used  by  the  combina- 
tion in  1909  and  19 10. 

(19)  That  the  factory  costs,  other  than  leaf,  of  the  successor 
companies  in  1912  and  191 3  and  of  the  combination  in  1909 
and  1910  were  not  materially  different. 

(20)  That  almost  invariably  marked  increases  or  decreases  in 


320  TRUSTS,    POOLS  AND   CORPORATIONS 

the  volume  of  particular  brands  decidedly  reduced  or  increased, 
respectively,  factory  costs  other  than  leaf. 

(21)  That  increases  in  selling  cost  after  the  dissolution  were 
general,  resulting  from  the  duplication  of  selling  organization 
and  increased  overhead  expense,  due  to  the  division  of  the  busi- 
ness. 

(22)  That  there  was  a  marked  increase  in  the  advertising 
expenditure  of  the  successor  companies  as  compared  with  that 
of  the  combination. 

(23)  That  the  aggregate  amount  of  profit  of  the  successor 
companies  in  191 3  was  slightly  less  than  that  of  the  combina- 
tion in  1910  in  spite  of  a  larger  volume  of  sales. 

(24)  That  the  ratios  of  profit  to  net  receipts  less  tax  for  the 
successor  companies  in  191 3  were,  in  general,  comparatively 
low  in  those  branches  or  types  in  which  competition  for  business 
was  most  pronounced,  e.g.,  plug-cut  smoking  and  domestic  and 
blended  cigarettes,  and  very  high  in  those  in  which  competition 
was  slight,  e.g.,  snuff. 

(25)  That  on  the  book  value  of  the  total  investment  the  earn- 
ings of  the  successor  companies  averaged  12.1  per  cent  in  191 2 
and  1 1.3  per  cent  in  191 3,  while  the  profit  accruing  to  the 
holders  of  the  common  stock  in  respect  to  their  interest  was  at  a 
much  higher  rate. 

(26)  That  on  the  total  cost  of  investment,  assuming  that  the 
cost  of  investment  of  the  successor  companies  at  the  date  of 
dissolution  was  the  same  as  that  of  the  combination  in  the  cor- 
responding branches  of  the  business,  the  earnings  of  the 
successor  companies  averaged  14.6  in  191 3.  The  earnings  of 
the  combination  for  the  corresponding  business  in  1908  were 
17.9  per  cent  and  in  1910  about  17  per  cent. 

(27)  That  there  have  been  no  material  changes  in  prices  to 
the  jobbers  since  the  dissolution  of  the  combination. 

(28)  That  for  all  principal  brands  of  the  successor  companies 
there  have  been  practically  no  changes  in  prices  to  the  consumer 
since  the  dissolution  of  the  combination. 

(29)  That  the  high  profits  taken  in  conjunction  with  the  prac- 
tically unchanged  wholesale  and  retail  prices  of  tobacco  indicate 
that  there  has  been  but  little  competition  in  price,  but  this  is 


THE   TOBACCO    MONOPOLY  321 

explained  in  large  part  by  the  customary  retail  prices  and  other 
peculiar  price-making  conditions  of  the  tobacco  trade,  including 
statutory  provisions,  which  make  it  impracticable  in  most  cases 
to  increase  the  quantity  sold  at  the  customary  price. 

(30)  That  for  the  principal  brands  of  plug  tobacco,  the  manu- 
facturer's cost  in  1913  was  approximately  50  per  cent  of  the 
consumer's  price,  the  internal-revenue  tax  15  per  cent,  the 
manufacturer's  profit  10  per  cent,  and  the  jobber's  and  retailer's 
margin  25  per  cent ;  that  for  the  principal  smoking  and  cigarette 
brands  the  manufacturer's  cost  in  191 3  was  approximately  45 
per  cent  of  the  consumer's  price,  the  internal-revenue  tax  20 
per  cent,  the  manufacturer's  profits  10  per  cent,  and  the  job- 
ber's and  retailer's  margin  25  per  cent;  and  that  for  a  number 
of  the  snuff  brands  the  manufacturer's  cost  in  191 3  was  approxi- 
mately 35  per  cent  of  the  consumer's  price,  the  internal-revenue 
tax  15  per  cent,  the  manufacturer's  profit  20  per  cent,  and  the 
jobber's  and  retailer's  margin  30  per  cent. 

Other  Companies 

It  was  impracticable  to  obtain  price,  cost,  and  profit  data 
from  all  companies,  other  than  the  combination  and  successor 
companies.  However,  data  were  secured  from  64  of  the  other 
principal  concerns  manufacturing  plug  and  smoking  tobaccos, 
cigarettes,  and  cigars. 

In  respect  to  production,  however,  the  total  output  of  the 
country  is  available  from  the  records  of  the  Bureau  of  Internal 
Revenue,  and  these  figures  are  used  below  in  computing  the 
percentages  of  the  aggregate  production  of  all  other  companies 
than  the  combination  and  successor  companies. 

In  191 3  the  plug  output  of  the  companies,  other  than  the 
successor  companies,  covered  by  the  investigation  represented  65 
per  cent  of  the  total  production  of  all  such  other  companies,  the 
smoking  output  "/?>  per  cent,  and  the  cigarette  output  50  per  cent. 

The  salient  points  brought  out  by  this  part  of  the  report  rela- 
tive to  the  business  of  companies  other  than  the  combination 
and  successor  companies,  before  and  since  the  dissolution  of  the 
combination,  are  as  follows  : 


322  TRUSTS,   POOLS   AND   CORPORATIONS 

(31)  That  for  companies  other  than  the  combination  and  suc- 
cessor companies  there  were  marked  decreases  in  the  proportions 
of  their  collective  output  in  the  plug,  smoking,  snuff,  cigarette, 
and  little-cigar  branches,  from  1905  to  191 3. 

(32)  That  compared  with  both  the  combination  and  successor 
companies  the  manufacturing  costs  of  the  other  companies  cov- 
ered by  the  investigation  were  extremely  high  in  practically  all 
branches. 

(33)  That  compared  with  either  the  combination  or  the 
successor  companies  the  selling  costs  per  unit  of  product  of 
other  companies  investigated  were  extremely  high  in  all 
branches. 

(34)  That  the  larger  margins  above  manufacturing  and  selling 
costs  of  the  combination  and  successor  companies  enabled  them 
in  most  branches  to  spend  from  three  to  five  times  as  much  per 
unit  of  product  for  advertising  or  competitive  purposes  as  the 
other  companies  investigated  and  at  the  same  time  to  obtain 
practically  the  same  or  even  greater  rates  of  profit. 

(35)  That  compared  with  the  combination  and  successor 
companies  the  other  companies  investigated  made  an  exceed- 
ingly poor  showing  of  profits  and  that  there  was  a  marked  de- 
crease in  profits  of  these  companies  in  navy  plug  and  Turkish 
cigarettes  since  the  dissolution  of  the  combination. 

(36)  That  among  companies  investigated  other  than  the 
Combination  and  successor  companies  the  operations  of  the 
larger  ones  were,  as  a  rule,  the  most  profitable  ;  and,  in  the 
manufactured  tobacco  business,  those  doing  a  general  tobacco 
manufacturing  business  usually  were  more  prosperous  than 
those  manufacturing  exclusively  one  class  of  product.  The 
operations  of  certain  small  companies,  however,  having  espe- 
cially popular  brands  were  also  profitable. 

(37)  That  the  companies  other  than  the  combination  and 
successor  companies  which  were  the  most  successful  in  increas- 
ing their  output  were  the  ones  that  adopted  the  coupon  adver- 
tising system,  i.e.,  the  method  of  giving  coupons,  which  are 
redeemable  in  either  cash  or  articles  of  merchandise,  as  an  in- 
ducement for  trade. 

(38)  That  the  independent  companies,  like  the  combination. 


THE   TOBACCO    MONOPOLY  323 

did  not  generally  reduce  prices  in  1901  and  1902,  during  which 
time  the  revenue  tax  was  materially  reduced. 

(39)  That  the  independent  companies,  like  the  combination, 
generally  increased  prices  on  smoking  tobacco  in  1910  to  meet 
the  increase  in  tax  rate,  and  that  the  increase  in  price  in  most 
cases  exceeded  the  increase  in  tax,  but,  like  the  combination, 
they  did  not  increase  prices  on  plug,  cigarettes,  or  cigars. 


IX 

THE    INTERNATIONAL   HARVESTER   COMPANY  ^ 

Conditions  Leading  up  to  Organization 

THE  International  Harvester  Co.  was  organized  in  August, 
1902,  under  New  Jersey  laws,  as  a  consolidation  of  the 
following  companies : 

McCormick  Harvesting  Machine  Co. 
Bearing  Harvester  Co.  (a  partnership). 
Warder,  ]>ushnell  &  Glessner  Co.  (Champion). 
Piano  Manufacturing  Co. 
Milwaukee  Harvester  Co. 

These  concerns  were  the  principal  manufacturers  of  harvest- 
ing machines.  In  fact,  the  only  other  important  manufacturers 
of  such  machines  were  a  few  companies  located  in  New  York 
State,  engaged  largely  in  trade  with  foreign  markets,  none  of 
which  did  an  extensive  business  in  the  principal  domestic  market 
for  harvesting  machines,  namely,  the  grain-producing  States  of 
the  Mississippi  River  basin. 

The  organization  of  the  company  followed  a  long  period  of 
keen  competition  among  manufacturers  of  harvesting  machines. 
An  earlier  attempt  (in  1890)  to  bring  about  a  general  consolida- 
tion of  the  principal  manufacturers  of  such  machines  proved 
abortive.  Although  a  temporary  organization  was  effected  in 
that  year  under  the  name  of  the  American  Harvester  Co.,  with 
$35,000,000  authorized  capital  stock,  this  had  hardly  been  ac- 
complished before  the  scheme  fell  through.     From  that  time 

1  From  Report  U.  S.  Commissioner  of  Corporations,  March  3,  1913,  pp.  2-37. 
Omissions  are  not  always  shown  in  detail.  Cf.  also  the  Supreme  Court  opinion, 
Chapter  XVIII,  infra. 

324 


THE    INTERNATIONAL   HARVESTER   COMPANY      325 

down  to  the  organization  of  the  International  Harvester  Co., 
the  harvesting-machine  industry  appears  to  have  been  peculiarly 
free  both  from  efforts  at  consolidation  and  also  from  the  ordi- 
nary price  agreements  which  were  characteristic  of  many  in- 
dustries. In  fact,  the  formation  of  the  International  Harvester 
Co.  has  repeatedly  been  attributed  by  some  of  its  principal  of- 
ficers to  the  severity  of  competition  during  this  period. 

Cyrus  H.  McCormick,  president  of  the  company,  in  testimony 
in  judicial  proceedings  in  Missouri  in  1908,  described  this  com- 
petition as  "fierce,"  and  stated  that  a  desire  to  remove  what  he 
termed  "  unbusinesslike  methods "  was  one  of  the  principal 
reasons  for  forming  the  consolidation.  He  further  stated  that 
during  this  period  of  competition  a  large  portion  of  the  sales  of 
the  competing  companies  were  made  below  the  listed  prices. 

Again,  J.  J.  Glessner,  formerly  of  the  Warder,  Bushnell  & 
Glessner  Co.,  makers  of  the  Champion  machines,  referred  to  the 
competition  as  a  "  bitter  fight,"  stating  that  his  concern  did 
everything  that  it  possibly  could  to  prevent  its  competitor  from 
making  a  sale. 

Still  again,  W.  H.  Jones,  formerly  of  the  Piano  Manufactur- 
ing Co.,  stated  explicitly  that  the  merger  was  organized  to  aboHsh 
"  fierce  competition."  This  is  shown  by  the  following  excerpt 
from  his  testimony  in  the  Missouri  proceedings  : 

Q.  So  in  order  to  get  rid  of  this  fierce  competition  you  formed  this 
new  organization  ?  —  A.  We  had  to  do  it  or  wind  up  the  business. 
If  we  had  not,  we  would  have  thrown  all  our  men  out  of  employment. 
The  best  thing  to  do  was  to  get  rid  of  the  fierce  competition,  to  get 
rid  of  the  waste  of  money  in  canvassers.  We  have  not  half  as  many 
canvassers  to-day  as  we  did  have. 

Q.  The  canvassers  were  necessary  to  maintain  your  competition? 
—  A.    Before  that,  we  did  it  to  beat  one  another  out  of  business. 

Q.  Is  that  not  what  you  call  competition  ?  —  A.  Pretty  sharp  com- 
petition. 

Q.  It  was  to  get  rid  of  that  you  made  your  combination  ?  — 
A.    Yes,  sir  ;  to  better  the  entire  thing ;  no  question  about  that. 

While  it  has  also  been  claimed  that  economies  of  consolidation 
and  the  possibility  of  developing  more  satisfactorily  the  export 
trade  were  likewise  considerations  in  bringing  about  the  merger, 


326  TRUSTS.    POOLS   AND    CORPORATIONS 

it  may  be  accepted  as  established  that  the  principal  reason  for 
the  formation  of  the  International  Harvester  Co.  was  the  ehmi- 
nation  of  the  competition  complained  of. 

The  severity  of  this  competition  has  frequently  been  set 
forth  as  a  full  justification  for  the  combination.  It  is  important 
to  point  out,  therefore,  that  notwithstanding  this  competition 
the  profits  in  the  business  were  large.  Thus,  the  profits  of  the 
five  combining  concerns  during  the  five  years  1898- 1902  aggre- 
gated nearly  $43,000,000,  or  an  average  of  nearly  $8,600,000  a 
year.  In  the  case  of  the  McCormick  concern,  the  profits  for 
the  year  preceding  the  merger  exceeded  12  per  cent  of  the  net 
assets  as  shown  by  its  books,  while  those  of  the  Deering  busi- 
ness were  nearlv  18  per  cent  of  such  book  assets,  and  those  of 
the  Milwaukee  Harvester  Co.  over  11  per  cent.  Data  for  com- 
parisons in  the  case  of  the  other  two  companies  are  not  avail- 
able, but  the  profits  of  these  apparently  were  smaller.  These 
1902  profits  may  have  somewhat  overstated  the  net  earnings 
available  for  dividends,  and  the  book  assets  are  not  an  entirely 
satisfactory  criterion  for  judging  their  exact  significance,  but  it 
is  certain  that  such  profits  were  liberal.  During  this  interval, 
moreover,  there  was  a  very  great  expansion  in  the  volume  of 
business  of  these  companies.  It  is  apparent,  therefore,  that 
while  competition  was  severe  it  was  by  no  means  destructive. 

It  may  be  noted  that  many  of  the  basic  patents  for  harvest- 
ing machinery  had  expired,  and  were  open  to  all  who  cared  to 
engage  in  the  manufacture  of  such  machinery. 

Methods  by  which  the  Company  was  Organized 

Representatives  of  the  company,  and  particularly  of  its  finan- 
cial organizers,  have  repeatedly  insisted,  at  times  in  sworn  testi- 
mony, that  the  combination  was  not  brought  about  by  the 
concerted  action  of  the  interests  united,  but  instead  that  the  five 
concerns  were  purchased  independently  the  one  of  the  other  by 
the  banking  interests,  and  subsequently  merged  into  a  single 
organization. 

These  assertions  may  be  sufficiently  disposed  of  by  citing 
from    a    statement    made    by    Stanley   McCormick    and    Cyrus 


THE    INTERNATIONAL   HARVESTER   COMPANY      327 

Bentley,  legal  counsel  of  the  McCormicks,  to  G.  W.  Perkins  on 
June  27,  1902,  in  New  York  City,  and  confirmed''^  a  type- 
written memorandum  left  with  Mr.  Perkins  after  having  been 
revised  at  the  head  offices  of  the  McCormick  concern.  This 
statement,  which  is  given  in  full  in  this  report,  contained  re- 
peated references  to  conferences  between  representatives  of  the 
harvesting  machine  companies  themselves,  as  the  following  ex- 
cerpts show : 

The  McCormick  and  Bearing  people,  in  talking  over  how  they 
might  get  together,  estimated  in  the  matter  of  good  will  that  about 
two  average  years'  profits  ought  to  represent  the  good  will  of  each 
company's  business.  In  negotiations,  not  a  great  while  ago,  the 
Deerings  rather  expressed  the  opinion  that  if  the  McCormick  and 
Deering  companies  were  to  come  together  it  ought  to  be  on  a  basis  of 
about  53  for  the  McCormick  company  and  47  for  the  Deering,  while 
the  McCormicks'  figures  had  been  anywhere  from  55  to  60  for  the 
McCormick  company  and  40  to  45  for  the  Deering  company.  .  .  . 

Mr.  Glessner  is  president  of  this  [the  Champion]  company.  Mr. 
Harold  McCormick  saw  him  three  or  four  weeks  ago  and  sounded 
him  as  to  what  he  would  think  of  the  several  harvesting  machine 
companies  getting  together.  Mr.  Glessner  seemed  to  be  very  much 
interested  in  having  it  done,  and  said  that  his  company  would  not  be 
particular  as  to  details  or  as  to  what  influence  would  predominate.  .  .  . 

Mr.  W.  H.  Jones  is  president  of  this  [the  Piano]  company,  and  is 
the  dominating  influence.  Mr.  O.  W.  Jones,  his  brother,  is  vice- 
president.  He  visited  Mr.  McCormick  about  four  weeks  ago,  and 
in  a  casual  way  asked  if  something  could  not  be  done  in  the  way 
of  combination.  He  remarked  :  '•  If  you  and  I  were  appointed  a 
committee  of  two  to  put  this  through,  it  wouldn't  take  us  a  week 
to  wind  it  up  "  —  giving  the  impression  that  he  was  anxious  to  see  it 
put  through.   .  .  . 

Mr.  Deering  has  approached  both  the  Piano  and  Champion  com- 
panies, but  so  far  as  is  known  he  has  no  option  on  either  one.  .  .  . 
The  Deerings  have  indicated  that  they  would  prefer  not  to  sell  for 
cash,  but  would  take  securities  and  keep  an  interest  in  the  manage- 
ment of  the  new  organization. 

Mr.  Deering  has  urged  that  the  whole  trade  be  taken  into  the  com- 
bination. Against  this  it  has  been  suggested  to  him  that  if  only 
90  per  cent  were  brought  in,  it  would  be  quite  possible  to  deal  with 
another  of  the  minor  companies  if  any  one  made  excessive  demands. 


328  TRUSTS,    POOLS  AND   CORPORATIONS 

That  is,  no  minor  company  is  probably  essential  to  the  combination, 
although  the  five  named  are  undoubtedly  the  most  desirable. 

It  is  therefore  conclusively  established  by  documentary  evi- 
dence that  a  consolidation  of  the  five  leading  harvesting-machine 
makers  had  been  considered,  not  merely  by  the  bankers,  but 
actively  considered  and  discussed  by  the  leading  interests  them- 
selves, and  this  for  a  considerable  period  prior  to  the  organiza- 
tion of  the  company.  These  discussions  had  specifically  covered 
the  relative  values  of  some  of  the  combining  companies,  the 
policy  to  be  adopted  with  respect  to  other  concerns  than  the  five 
mentioned,  and  also  the  question  as  to  who  should  have  a 
controlling  interest  in  the  new  organization.  Moreover,  the 
McCormick  interests  assisted  the  bankers  in  arranging  for  the 
acquisition  of  the  Milwaukee  Harvester  Co. 

Terms  of  Consolidation 

The  process  by  which  the  merger  was  actually  accomplished 
involved  a  number  of  formal  legal  transactions.  On  July  28, 
1902,  four  separate  agreements  were  entered  into  between  the 
McCormick,  Deering,  Piano,  and  Champion  concerns,  respec- 
tively, called  the  "  vendors,"  and  William  C.  Lane,  called  the 
"  purchaser,"  all  in  substantially  the  same  general  form,  but 
differing  in  certain  details.  These  contracts  set  forth  that  the 
respective  vendors  were  the  owners  of  certain  plants  for  the 
manufacture  of  harvesting  machines,  and  that  Lane,  the  pur- 
chaser, desired  to  acquire  them  for  the  purpose  of  selHng  them 
to  a  company  to  be  formed  subsequently,  and  referred  to  as  the 
"purchasing  company."  In  pursuance  of  these  contracts  and 
supplemental  contracts  of  August  11,  1902,  it  was  arranged 
that  for  the  plants  and  other  physical  properties  thus  conveyed, 
together  with  the  entire  property  of  the  Milwaukee  Harvester 
Co.,  which  was  put  in  by  the  bankers  as  a  going  concern,  and 
for  the  payment  of  the  bankers'  commission,  $60,000,000  of 
stock  was  to  be  issued.  An  additional  $60,000,000  of  stock 
was  to  be  issued  for  $60,000,000  cash.  Of  this  amount 
$19,000,000  was  to  be  contributed  by  the  bankers  and  their 
associates,  and  $41,000,000  by  the  four  vendor  companies,  as 


THE    INTERNATIONAL   HARVESTER   COMPANY      329 

follows:  McCormick,  ;^20, 000,000;  Deering,  $16,000^00;  Piano, 
;^4,ooo,ooo ;  Champion,  ;^  1,000,000.  By  a  subsequent  arrange- 
ment, however,  the  McCormick  and  Deering  interest  agreed 
to  contribute  about  $9,000,000  additional  working  capital,  so  that 
only  about  $10,000,000  was  directly  raised  by  the  bankers. 
The  payment  of  most  of  the  working  capital  provided  by  the 
vendor  companies  was  arranged  through  the  assignment  of 
bills  receivable  for  collection. 

The  contracts  further  provided  that  the  purchase  price  of  the 
physical  properties  should  equal  their  appraised  value.  Pro- 
vision was  made  for  valuing  the  good  will  on  the  basis  of  two 
years'  profits,  plus  10  per  cent.  These  arrangements  were  subse- 
quently modified  by  additional  contracts. 

Immediately  after  the  contracts  of  August  11,  1902,  were 
entered  into,  the  International  Harvester  Co.  was  organized  by 
a  group  of  temporary  or  "  dummy  "  incorporators,  the  cer- 
tificate of  incorporation  being  filed  in  New  Jersey  on  August 
12,  1902.  Temporary  directors  were  elected,  who  at  once  took 
under  consideration  a  written  offer  from  W.  C.  Lane  to  transfer 
the  plants,  good  will,  and  other  property,  excluding  receivables, 
of  the  McCormick,  Deering,  Piano,  and  Champion  concerns, 
together  with  the  Milwaukee  company  as  a  whole,  and  work- 
ing capital  of  $60,000,000.  The  plants,  good  will,  etc.,  were 
nominally  valued  at  $132,000,000,  thus  making  a  total  nominal 
value  of  $192,000,000.  In  payment  therefore  Mr.  Lane  offered 
to  accept  the  entire  capital  stock  of  the  International  Harvester 
Co.,  namely,  $120,000,000  par  value,  subject  to  a  provision  that 
if  any  additional  stock  were  issued  by  the  company  prior  to 
July  I,  1903,  on  account  of  the  nominal  surplus  of  $72,000,000, 
then  this  original  $120,000,000  of  common  stock  should  be- 
come preferred  stock  and  the  additional  stock  should  be  com- 
mon stock,  to  be  issued  to  the  holders  of  the  preferred, //v  rata. 

On  August  13,  1902,  W.  C.  Lane  and  E.  H.  Gary  (chairman 
of  the  United  States  Steel  Corporation)  appeared  before  the 
temporary  board  of  directors  and  explained  Lane's  offer,  which 
was  promptly  accepted.  Resolutions  were  adopted  to  the  effect 
that  the  properties  and  working  capital  were  worth  the  amount 
stated  by  Lane  ($192,000,000),  and  that  the  treasurer   should 


330  TRUSTS,    POOLS   AND   CORPORATIONS 

enter  the  proper  amounts  in  the  books  of  account,  including  a 
surplus  of  $72,000,000. 

This  surplus  of  $72,000,000  was  entirely  arbitrary,  and,  in 
fact,  wholly  fictitious.  It  is  obvious  that  at  the  time  it  had  not 
been  definitely  decided  whether  the  company  should  be  organ- 
ized with  a  capitalization  approximately  commensurate  with  the 
value  of  its  assets  or  whether  it  should  issue  stock  greatly  in 
excess  of  that  capitalization. 

On  the  same  day  (August  13)  the  new  stockholders  took  con- 
trol of  the  company.  The  temporary  directors  resigned,  and  18 
directors  were  elected  in  their  places.  Of  these  18  directors,  10 
were  largely  interested  in  the  four  companies  merged ;  3  others 
had  been  connected  with  such  concerns  or  individuals  as  coun- 
sel;  4  represented  either  the  bankers  (J.  P.  Morgan  &  Co.),  or 
capitalists  associated  with  them;  the  only  remaining  director 
was  put  in  to  comply  with  the  corporation  laws  of  New  Jersey 
requiring  a  resident  director. 

On  the  same  day  also  the  temporary  officers  of  the  company 
resigned  and  the  principal  officers  elected  in  their  places  were  as 
follows:  Cyrus  H.  McCormick,  president;  James  Deering, 
Harold  F.  McCormick,  W.  H.  Jones,  and  J.  J.  Glessner,  vice 
presidents ;  Richard  F.  Howe,  secretary  and  treasurer.  The 
executive  committee,  of  which  Charles  Deering  was  made 
chairman,  included  the  principal  representatives  of  four  of  the 
companies  merged,  and  G.  W.  Perkins,  who  was  also  made 
chairman  of  the  finance  committee. 

An  important  step  in  carrying  out  the  original  contracts  of 
July  28,  1902,  with  the  principal  companies  entering  the  merger, 
namely,  the  establishment  of  a  voting  trust,  was  made  on 
August  13  by  execution  of  the  voting  trust  agreement  and  the 
appointment  of  the  following  persons  as  voting  trustees,  namely, 
George  W.  Perkins,  Charles  Deering,  and  Cyrus  H.  McCormick. 

The  actual  consummation  of  the  merger,  as  explained  in  more 
detail  in  the  full  text  of  the  report,  involved  certain  additional 
contracts.  This  was  due  to  the  fact  that  since  the  contracts  of 
August  II,  1902,  limited  the  total  issue  of  capital  stock  to 
$120,000,000,  and  since  $60,000,000  of  this  was  to  be  issued  for 
working  capital,  there  would  have  been  nothing  left  for  the 
bankers  and  promoters  or  for  the  purchase  of  the  Milwaukee 


THE    INTERNATIONAL    HARVESTER   COMPANY      331 

Harvester  Co.  in  cd,se  the  appraisal  of  the  physical  properties  of 
the  four  vendor  companies  amounted  to  as  much  as  ^0,000,000. 
The  contemplated  compensation  of  the  bankers  was  ^3,000,000 
in  stock,  and  the  cost  of  the  Milwaukee  company  (put  in  by  the 
bankers),  together  with  certain  expenses,  amounted  to  more 
than  ^3,500,000.  If  these  items  were  to  be  provided  for, 
therefore,  there  would  be  only  about  ^53,000,000  of  stock 
left  to  pay  for  the  plants  and  other  physical  properties  of 
the  four  vendor  companies.  It  was  agreed,  therefore,  by  an 
additional  contract  dated  August  17,  1903,  that  certain  specified 
amounts  of  stock  should  be  allotted  to  each  of  the  vendor  com- 
panies in  lieu  of  the  amounts  to  be  determined  by  the  appraisals. 
The  amounts  agreed  upon,  subject  to  slight  adjustments,  were 
as  follows  : 

McCormick  company  ......  ^26,321,656.86 

Deering  company         .......     21,362,554.64 

Champion  company  ......       3,372,185.91 

Piano  company  .......       2,193,603.09 

Total ;?5  3, 250,000. 50 

It  will  be  seen,  therefore,  that  the  elaborate  appraisals  made 
of  the  physical  properties  of  the  vendor  companies  really  did 
not  determine  the  amounts  of  stock  issued.  Subsequently, 
however,  these  appraisals,  when  completed,  were  used  to  some 
extent  for  bookkeeping  purposes.  The  final  allotment  of  the 
^120,000,000  capital  stock  of  the  International  Harvester  Co.  is 
briefly  summarized  in  the  table  on  the  following  page. 

The  table  is  in  the  main  explained  by  the  preceding  discussion. 
It  will  be  noticed  that  certain  small  amounts  were  deducted  from 
the  "  plant  stock  "  issued  to  the  bankers  and  to  the  McCormick 
and  Deering  interests,  together  aggregating  $150,000,  this 
amount  being  divided  equally  between  the  Champion  and  Piano 
interests.  Again,  while  $3,000,000  of  stock  was  allotted  for  the 
acquisition  of  the  Milwaukee  Harvester  Co.,  on  actual  appraisal 
the  value  was  established  at  $3,148,196.66.  The  excess  was 
issued  to  the  bankers  out  of  the  cash  stock.  The  banking  in- 
terests also  raised  $10,000,000  of  cash  capital  (including  $60,000 
paid  in  by  the  temporary  incorporators).  The  remaining  cash 
capital  was  raised  by  the  various  manufacturing  interests  as  in- 
dicated in  the  table  (on  the  next  page). 


332  TRUSTS,   POOLS  AND   CORPORATIONS 

DISPOSITION   OF   ORIGINAL  $120,000,000   CAPITAL   STOCK   OF  INTER- 
NATIONAL  HARVESTER   CO. 

Plant  Stock 
J.   P.  Morgan  &  Co.  : 

Commission .   $3,000,000.00 

Less    contribution    to     Champion 

and  Piano  companies     ....  42,857.14 

2,957,142.86 
Milwaukee  Harvester  Co.     .     .     .     3,000,000.00 

$5,957,142.86 

McCormick  interests : 

Original  allotment 26,321,656.86 

Less     contribution     to    Champion 

and  Piano  companies   ....  59,142.86 

26,262,514.00 

Deering  interests : 

Original  allotment 21,362,554.64 

Less    contribution     to    Champion 

and  Piano  companies  ....  48,000.00 

21,314,554.64 

Piano  interests : 

Original  alUitment 2,193,603.09 

Plus      contributions      from 
other  interests 75,000.00 

2,268,603.09 

Champion  interests : 

Original  allotment 3,372,185.91 

Plus       contributions      from 

other  interests 75,000.00 

3.447. 1S5. 91 

Organization  expenses  (excluding  Mil- 
waukee  company   and  incorporators' 

stock)  :         

Sold 611,803.34 

On  hand 138,196.16 

749.999-5° 

$60,000,000.00 

Cash  Stock 
J.  P.  Morgan  &  Co. : 

Cash $9,940,000.00 

Incorporators 60,000.00 

Milwaukee  excess 148,196.66 

$10,148,196.66 

McCormick  interests : 

Original  subscription 20,000,000.00 

Subsequent  subscription  ....     4,886,190.13 

24,886,190.13 

Deering  interests: 

Original  subscription 16,000,000.00 

Subsequent  subscription       .     .     .     3,965,613.21 

19,965,613.21 

Piano  interests 4,000,000.00 

Champion  interests 1,000,000.00 

$60,000,000.00 


THE    INTERNATIONAL    HARVESTER   COMPANY      333 

Of  the  Si20,ooo,ooo  capital  stock  of  the  company,  $103,144,- 
660.98,  or  86  per  cent,  was  received  by  the  McCormiclCDeering, 
Champion,  and  Piano  interests.  The  McCormick  interests 
alone  received  $51,148,704.13,  or  42.6  per  cent,  and  the  Deering 
interests  $41,280,167.85,  or  34.4  per  cent.  These  two  groups 
together,  therefore,  received  no  less  than  jj  per  cent  of  the 
total  capital  stock.  As  a  matter  of  fact,  while  the  voting  trust 
technically  gave  the  McCormick.  Deering,  and  Morgan  interests 
equal  voice  in  the  management  of  the  company,  the  predomi- 
nating influence  appears  to  have  been  with  the  McCormick 
interests. 

Position  of  the  International  Harvester  Co.  at  its 
Organization 

At  its  organization  the  International  Harvester  Co.  controlled 
approximately  85  per  cent  of  the  total  production  of  harvesting 
machines  in  the  United  States.  While  exact  data  on  production 
are  not  available,  statistics  of  sales  show  that  in  binders  the 
companies  composing  the  new  combination  had  handled  ap- 
proximately 90  per  cent  of  the  business  in  the  year  prior  to  the 
merger ;  in  mowers,  about  8 1  per  cent ;  and  in  rakes,  about  ^y 
per  cent.  This  is  shown  by  the  following  comparison  of  sales 
in  the  1902  season  : 


Binders 
Mowers 
Rakes 


Sold  by  International 
Harvester  Co. 

Companies, 
Season  of  1902 1 


Number 
I  S0.024 

297,SSo 
;i65,2i9 


Pir  cent 
90.9 
81.2 
67.0 


Sold  by  Independent 

Companies, 

Season  of  1902' 


Number 
1S.128 
68,890 

3  81,376 


Per  cent 

9-1 

18.8 

33-0 


The  important  machines  were  binders  and  mowers,  and  com- 
bining these    it  may  be   safely  said  that   85    per  cent    of    the 

1  Number  produced  in  case  of  the  Milwaukee  company. 
-  Number  produced  in  case  of  the  Osborne  company. 
3  Number  for  independents  partly  estimated. 


334  TRUSTS,   POOLS  AND   CORPORATIONS 

business  was  handled   by  the  new  consolidation  at  its  organi- 
zation. 

The  McCormick  company  had  much  the  largest  production 
for  each  class  of  harvesting  machines ;  the  Deering  company 
was  second  in  each  case.  The  Champion  concern  stood  third 
with  respect  to  binders  and  mowers,  while  the  Milwaukee  had 
the  smallest  output  for  all  the  principal  machines. 

Comparison  of  Capitalization  with  Investment 

As  already  shown,  of  the  capital  stock  of  $120,000,000  at  the 
time  of  organization,  $60,000,000  was  issued  for  plants,  inven- 
tories, and  similar  property,  and  $60,000,000  for  working  capital. 
The  appraised  value  of  the  property  acquired  by  the  $60,000,000 
of  "plant  stock,"  so  called,  was  $67,000,000  exclusive  of  good 
will,  and  the  company  claims  therefore  that  it  started  with  a 
surplus  of  $7,000,000.  This  surplus  was  later  written  off.  As 
a  matter  of  fact,  this  appraisal  of  $67,000,000  for  the  property 
acquired  by  the  plant  stock  was  in  excess  of  a  fair  valuation, 
exclusive  of  good  will.  As  shown  below,  the  Bureau  has  ar- 
rived at  a  valuation  for  this  property  of  only  about  $49,100,000, 
The  difference  between  this  and  the  $60,000,000  of  stock  issued 
therefor,  so  far  as  covered  by  any  value  whatever,  must  be  set 
against  good  will. 

The  net  result  of  the  Bureau's  readjustment  of  the  valuations 
was  to  give  a  total  of  $49,117,356.08  as  the  maximum  valuation 
of  the  physical  property  and  inventories  acquired  by  the  Inter- 
national Harvester  Co.  from  the  five  companies  forming  the 
combination,  as  shown  in  the  table  on  the  opposite  page. 

The  Bureau  believes  that  while  this  valuation  might  be  some- 
what reduced  if  all  the  facts  were  available,  any  adjustment 
which  would  be  made  would  not  be  of  decisive  importance.  This 
maximum  valuation  of  $49,100,000  compares  with  $60,000,000 
"  Plant  stock "  issued  for  such  property  and  for  promoters' 
expenses  and  services.  This,  as  already  noted,  leaves  a  differ- 
ence of,  roughly,  $10,900,000  to  be  represented  by  intangible 
considerations,  such  as  good  will. 


THE    INTERNATIONAL   HARVESTER   COMPANY      335 

FIVE   PREDECESSOR   COMPANIES:     VALUATIONS   OF   PHYSICAL 
PROPERTIES,    1902  --^ 

[N.  B.  —  No  book  values  available  for  Champion  and  Piano,  therefore  total  book  valua- 
tions cannot  be  given.] 


Factory    real    estate,    buildings, 

and  machinery 

Agency  property 

Railroads 

Ore,  coal,  iron,  and  steel  .     . 

Timber 

Miscellaneous  1 

Inventories 

Total 


Harvester  Co. 


$23,270,218.14 

2,249,882.33 
2,579,324-82 

9,574,138-79 

1,874,800.22 

1,979,702.93 

25,548,162.42 


67,076,229.65 


Bureau 


^20,787,435.09 

2,173,539-56 
510,645.22 

1,858,326.92 
839,552.98 

1,717,206.00 
21,230,650.31 


49,117,356-08 


Difference 
$2,482,783.05 

76,342-77 
2,068,679.60 
7,715,811.87 
1,035,247.24 
262,496.93 
4,317,512.11 


17,958,873-57 


Good  Will 

The  Bureau  has  not  attempted  to  value  any  good  will  which 
the  constituent  concerns  of  the  consolidation  may  have  brought 
into  the  merger.  In  the  original  contracts  on  which  the  com- 
bination was  based  it  was  agreed  that  good  will  should  be 
valued  at  the  sum  of  the  profits  of  the  two  preceding  years  plus 
an  additional  10  per  cent.  By  this  method  of  valuing  good  will, 
which  was  more  or  less  commonly  used  among  manufacturers, 
the  total  value  of  the  good  will  was  placed  at  about  $20,800,000. 
If  good  will  be  allowed  for  the  Milwaukee  company  on  the 
same  basis,  the  total  good  will  of  the  combination  would  be 
about  $21,300,000. 

Without  indorsing  this  valuation,  the  Bureau  is  nevertheless 
of  the  opinion  that  there  was  a  substantial  good-will  value 
brought  into  the  merger.  The  McCormick,  Deering,  and  Mil- 
waukee companies,  as  already  shown,  made  a  Hberal  rate  of 
profit  while  operating  independently.  This  fact,  together  with 
the  fact  that  their  business  had  been  long  established,  and  that 
their  machines  were  always  sold  under  brand  name,  indicates 

1  For  Milwaukee  company  includes  net  working  capital  after  deducting  $148,196.66 
for  plant  stock  excess. 


336  TRUSTS,    POOLS  AND   CORPORATIONS 

that  these  concerns  must  have  had  a  large  good  will.  Against 
this  there  should  be  set  the  fact  that  the  harvesting-machine 
business  had  apparently  been  somewhat  overdone  prior  to  the 
merger,  and  that  there  was  some  danger  of  a  loss  of  good  will 
as  the  very  result  of  the  formation  of  a  combination  or  trust 
like  the  International  Harvester  Co. 

Working  Capital 

The  stock  issued  for  working  capital,  so  far  as  the  vendor  com- 
panies are  concerned,  was  paid  in  chiefly  through  the  collection 
of  bills  receivable  of  the  principal  constituent  companies.  About 
$10,000,000  of  this  cash  stock  was  subscribed  for  at  par  by  the 
bankers.  The  Bureau  made  an  extended  investigation  of  the 
accounts  relating  to  this  provision  of  working  capital,  and  so  far 
as  these  may  be  relied  upon  they  indicate  that  the  full  amount 
of  $60,000,000  was  actually  paid  in  in  cash.  Representatives  of 
the  International  Harvester  Co.,  moreover,  repeatedly  declared 
that  there  was  no  deduction  or  allowance  from  this  cash  payment, 
but  that  the  full  amount  was  actually  paid  in  as  represented. 

Subsequent  Acquisitions  and  Extensions 

Immediately  after  its  organization  and  almost  continuously 
thereafter  the  International  Harvester  Co.  pursued  the  policy  of 
expanding  its  control  over  the  farm-machinery  business,  not  only 
in  harvesting  machines  but  also  in  various  other  branches. 
This  process  maybe  divided  into  three  parts:  ( i)  Acquisition 
of  competitors  in  the  harvesting-machine  business;  (2)  acquisi- 
tion of  concerns  making  other  lines  of  farm  machinery ;  and 
(3)  construction  of  new  plants  in  the  United  States  and  in 
various  foreign  countries  for  the  manufacture  of  harvesting 
machines  and  other  farm  machinery. 

Shortly  after  its  organization,  namely,  in  January,  1903,  it 
acquired  secret  control  of  D.  M.  Osborne  &  Co.,  of  Auburn, 
N.  Y.,  the  most  important  manufacturer  of  harvesting  machines 
not  originally  taken  into  the  combination.  This  secret  control 
was  maintained  for  nearly  two  years.  During  this  period  the 
Osborne  company  was  operated  and  advertised  as  an  independent 


THE    INTERNATIONAL   HARVESTER   COMPANY      337 

concern,  and  these  representations  were  supported  byjts  man- 
agers in  sworn  statements  that  it  was  an  independent  company. 
The  International  Harvester  Co.  claims  that  this  was  done  to 
enable  the  original  owners  to  collect  certain  obligations  due 
them  and  that  it  was  done  at  their  request.  While  the  Osborne 
company  had  a  valuable  line  of  tillage  implements,  its  chief 
importance  lay  in  the  production  of  harvesting  machines,  in 
which  it  had  an  extensive  foreign  trade.  In  selling  this  con- 
cern the  two  largest  active  stockholders  of  the  Osborne  company 
(T.  M.  Osborne  and  Edwin  D.  Metcalf )  covenanted  with  the  Inter- 
national Harvester  Co.  that  they  would  refrain  from  engaging 
independently  in  the  same  business  for  a  period  of  ten  years. 

In  a  similar  secret  way  the  International  Harvester  Co., 
between  1903  and  1904,  acquired  control  of  several  other  con- 
cerns which  competed  in  the  manufacture  of  harvesting 
machines  and  twine,  .  .  .  and  operated  them  without  disclosing 
such  control  for  various  periods.  In  the  case  of  the  Minnie 
Harvester  Co.  it  is  claimed  that  this  method  was  used  merely 
to  facilitate  the  liquidation  of  the  company. 

Negotiations  were  also  had  with  a  number  of  other  competing 
makers  of  harvesting  machines  with  a  view  to  acquiring  their 
properties  or  business,  in  whole  or  in  part.  .  .  .  These  negotia- 
tions, however,  were  riot  consummated. 

Extensions  Into  New  Lines 

Aside  from  these  acquisitions  of  competing  concerns,  the  In- 
ternational Harvester  Co.  has  greatly  expanded  its  business  by 
branching  out  into  new  lines  of  manufacture  or  sale.  Among 
the  most  important  lines  which  the  company  entered  in  this 
way  were,  manure  spreaders,  wagons,  plows,  and  seeders. 
Here  again  expansion  was  accompHshed  in  part  by  the  acquisi- 
tion of  concerns  already  organized. 

By  thus  extending  its  business  into  a  number  of  new  lines  the 
International  Harvester  Co.  not  only  increased  the  extent  of  its 
business,  but  where  it  was  thus  provided  with  satisfactory  goods, 
it  was  able  to  accomplish  their  sale  more  successfully  than  some 
of  the  former  owners,  partly  on  account  of  its  larger  financial 


338  TRUSTS,    POOLS   AND   CORPORATIONS 

resources  and  elaborate  selling  organization,  and  also  in  part 
on  account  of  the  pressure  it  was  able  to  exert  to  induce  dealers 
to  handle  these  new  lines.  To  a  considerable  extent  such 
dealers  were  not  allowed  to  handle  its  harvesting  machines  (in 
which  it  had  obtained,  as  already  shown,  a  substantially  monop- 
olistic position  by  means  of  combination),  unless  they  would 
take  these  new  lines  also.  It  is  apparent,  therefore,  that  not 
only  did  the  company's  strong  position  in  the  harvesting-machine 
business  facilitate  its  entrance  into  new  lines,  but  also  that 
these  new  lines  in  turn  afforded  a  further  means  of  maintaining 
its  position  in  the  harvesting-machine  business  itself. 

Construction  of  New  Plants 

The  International  Harvester  Co.  extended  its  business  in  the 
manufacture  of  harvesting  machines,  and  also  in  the  production 
of  new  lines  by  building  new  plants,  both  in  the  United  States 
and  in  foreign  countries.  Some  of  the  old  harvesting-machine 
plants  were  remodeled  and  used  for  making  new  lines  of  farm 
machinery.  The  most  important  new  plant  built  in  the  United 
States  was  a  large  tractor  plant  at  Chicago.  The  company, 
furthermore,  greatly  enlarged  its  plants  for  the  manufacture  of 
iron  and  steel. 

The  most  important  new  construction  of  the  company  was  in 
foreign  countries,  where  large  factories  have  been  built  for  the 
manufacture  of  harvesting  machines  and  other  farm  machinery, 
namely,  in  Canada,  Sweden,  France,  Germany,  and  Russia. 

Organisation  of  the  International  Harvester  Co.  of  America 

One  important  feature  of  the  policy  of  the  combination  was 
the  use  of  the  Milwaukee  Harvester  Co.,  as  a  selling  agency 
for  the  International  Harvester  Co.  of  New  Jersey.  For  this 
purpose  the  name  of  the  Milwaukee  company  was  changed  in 
September,  1902,  to  International  Harvester  Co.  of  America; 
the  capital  stock,  fixed  at  ^1,000,000,  is  all  held  by  the  New 
Jersey  company.  The  officers  and  directors  of  the  American 
company  were  until  19 10  all  officers  or  directors  of  the  inter- 
national Harvester  Co.  of  New  Jersey.     Apparently,  a  separate 


THE   INTERNATIONAL   HARVESTER   COMPANY      339 

organization  was  adopted  in  order  to  avoid  heavy  taxation  and 
the  delay  and  difficulty  of  procuring  new  licenses  to  do*Susiness 
required  in  various  States.  Such  licenses  were  often  prohibited 
in  case  the  foreign  corporation  applying  was  a  trust  or  combina- 
tion in  restraint  of  trade. 


Rearrangement  of  Capitalization 

In  1907  the  International  Harvester  Co.  divided  its  capital 
stock  of  $120,000,000  into  $60,000,000  of  preferred  and  $60,- 
000,000  of  common  stock.  Furthermore,  in  1910  a  stock  divi- 
dend of  $20,000,000  of  common  stock  was  declared  from  surplus, 
making  the  capital  stock  of  the  company  $140,000,000,  consist- 
ing of  $60,000,000  preferred  and  $80,000,000  common.  In 
this  connection  it  should  be  noted  that  the  voting  trust  was 
finally  dissolved  in  August,  191 2,  and  the  stock  distributed 
among  the  holders  of  the  stock  trust  certificates.  The  great 
bulk  of  the  stock  of  the  company  has  throughout  been  closely 
held  by  a  comparatively  few  interests,  who  have  also  been  active 
in  the  management  of  the  concern.  It  will  be  recalled  that  the 
McCormack  interests  had  approximately  43  per  cent  of  the 
stock  at  organization  and  the  Deerings  about  34  per  cent. 

On  January  29,  191 3,  the  directors  of  the  International  Har- 
vester Co.  announced  that  they  had  transferred  to  a  new  concern, 
the  International  Harvester  Corporation,  all  of  the  foreign  plants 
and  all  of  the  foreign  business,  also  certain  domestic  plants  en- 
gaged in  the  manufacture  of  the  so-called  new  lines,  together 
with  certain  assets  pertaining  thereto;  This  company  is  capi- 
talized at  $70,000,000,  consisting  of  $30,000,000  of  7  per  cent 
preferred  stock  and  $40,000,000  of  common  stock.  The  present 
International  Harvester  Co.,  the  name  of  which  it  is  proposed 
shall  be  changed  to  International  Harvester  Company  of  New 
Jersey,  will  retain  the  remaining  assets,  and  its  capital  stock  will 
be  reduced  to  $70,000,000,  likewise  consisting  of  $30,000,000  of 
7  per  cent  preferred  and  $40,000,000  of  common.  For  the 
$70,000,000  stock  of  the  present  company  canceled,  the  stock- 
holders will  be  entitled  to  receive  cash  or  a  pro  rata  distribution 
of  the  stock  of  the  new  International  Harvester  Corporation. 


340  TRUSTS,   POOLS   AND   CORPORATIONS 

This  action  by  the  company  is  admittedly  taken  in  view  of  the 
pending  dissolution  suit  of  the  United  States  Government 
against  the  company.  This  rearrangement  of  capitalization  was 
approved  by  the  stockholders  on  February  lo,  191 3.  If  in- 
tended as  part  of  a  plan  of  disintegration  the  Bureau  regards 
this  method  of  division  as  very  unsatisfactory. 

Present  Position  of  the  International  Harvester  Co. 

The  original  monopolistic  position  of  the  International  Har- 
vester Co.  in  harvesting-machine  lines  had  been  substantially 
maintained  up  to  the  close  of  19 11,  as  the  following  table  shows  : 

PROPORTION    OF    THE    HARVESTING-MACHINE   BUSINESS    OF    THE 

UNITED    STATES   CONTROLLED   BY   THE   INTERNATIONAL 

HARVESTER  CO.    IN   191 1^ 


Machines 


Grain  binders 
Mowers 
Rakes  . 


Manu- 
factured 
IN  United 
States 


Per  cent 
87.0 
76.6 
72.0 


Sold  in 
United 
States 


Per  cent 
87.2 
74.6 
68.0 


For  the  new  lines  of  farm  machinery  it  is  not  possible  in 
most  cases  to  show  the  precise  position  of  the  International 
Harvester  Co.,  but  in  several  of  them  it  has  acquired  a  very  con- 
siderable proportion  of  the  trade.  For  spreaders  the  Bureau 
has  obtained  statistics  covering  a  large  majority  of  the  inde- 
pendent production  and  sale  in  the  United  States,  and  has  made 
estimates  for  the  remainder  which  it  is  satisfied  are  approxi- 
mately correct.  A  comparison  of  these  figures  with  those  of 
the  International  Harvester  Co.  shows  that  the  company  has 
about  55  per  cent  of  the  191 1  production  in  the  United  States 
and  about  50  per  cent  of  the  sales.  A  comparison  for  disk  har- 
rows on  a  similar  basis,  for  which  the  Bureau  also  had  returns 

1  Percentages  based  on  practically  complete  returns  for  binders  and  mowers,  but 
partly  on  estimates  for  rakes  for  which  the  returns  covered  about  93  per  cent  of  the 
total  business. 


THE    INTERNATIONAL   HARVESTER    COMPANY      341 

for  a  substantial  majority  of  the  total  independent  business,  in- 
dicates that  the  Harvester  Co.'s  proportion  of  the  ntimber  pro- 
duced was  at  least  43  per  cent,  and  its  proportion  of  the  number 
sold  at  least  37  per  cent. 

For  certain  other  lines  also  the  International  Harvester  Co. 
has  acquired  a  large  proportion  of  the  business,  but  satisfactory 
data  are  not  available  to  show  its  percentage.  In  the  case  of 
wagons,  the  International  Harvester  Co.  had  nothing  at  the 
start,  but  according  to  the  best  estimates  that  can  be  made  by 
the  Bureau,  had  in  191 1  about  15  per  cent  of  the  number  manu- 
factured in  the  United  States  and  about  13  per  cent  of  the  num- 
ber sold,  although  the  total  production  of  farm  wagons  in  the 
United  States  has  decreased  in  recent  years. 

It  is  apparent,  therefore,  that  the  International  Harvester  Co. 
not  only  has  maintained  a  high  degree  of  monopoly  in  the  har- 
vesting-machine business  proper,  but  has  also  become  an  impor- 
tant factor  in  several  new  lines. 

The  expansion  of  these  various  concerns  is  one  of  the  most 
significant  features  of  the  farm-machinery  industry  to-day,  and 
one  involving  possibilities  of  great  importance.  It  is  important 
to  note  that  these  new  developments  have  been  made  on  the 
principle  of  carrying  a  so-called  full  Une  of  farm  machinery,  al- 
though it  should  be  understood  that  no  company,  not  even  the 
International  Harvester  Co.,  has  a  really  complete  Une. 

Profits  of  the  International  Harvester  Co. 

The  chief  feature  of  the  profits  of  the  International  Harvester 
Co.  is  the  increase  from  a  low  rate  in  the  early  years  of  the  or- 
ganization to  a  rather  high  rate  in  recent  years,  averaging  about 
I2|  per  cent  on  the  net  assets,  as  computed  by  the  Bureau,  for 
the  period  1909-191 1  ;  figures  for  the  year  1912  are  not  available. 

The  net  assets  and  profits  of  the  company  and  the  rate  of 
profit  on  the  net  assets  for  1903-1911,  as  thus  computed  by  the 
Bureau  in  both  cases,  are  shown  in  the  following  table.  The 
rates  are  computed  on  the  net  assets  at  the  beginning  of  each 
year ;  this  is  the  method  adopted  by  the  company  in  computing 
the  rates  on  capital  and  surplus. 


342 


TRUSTS,    POOLS   AND    CORPORATIONS 


Rate  of  Net  Earnings   of  the  International   Harvester   Co.  on  Net  As- 
sets, Exclusive  of  Good  Will,  as  Computed  by  the  Bureau,  by  Years, 

1903-19" 


Year 

m  -^  '^ 

Year 

^is 

End- 

Net Assets,  Ex- 

Net 

om 

End- 

Net Assets,  Ex- 

Net 

o«  , 

ing 

clusive  OF  Good 

H^O 

ing 

clusive  OF  Good 

Earnings 

H^S 

Dec. 

Will 

^  u-j  n 

Dec. 

Will 

31- 

^^5 

31- 

«S5 

Per 

Per 

cent 

cent 

1902I 

$109,117,356.08 

— 

— 

1908 

$122,522,298.85 

$10,179,726.02 

8.73 

1903 

106,314,179.00 

$796,822.92 

20.73 

1909 

134,781,142,61 

16,458,843.76 

13-43 

1904 

107,196,624.975,682,445.97 

5-34 

1910 

144,589,739,95 

17,208,597.34 

12.77 

1905 

109,907,909.127,511,284.15 
1x2,514,855.9917,406,946.87 

7.01 
6.74 

1911 

Total 

— 

16,638,703.28 

II. 51 

1906 

1,063,486,679.40 

90,111,087.15 

8.47 

1907 

116,542,572.838,227,716.84 

7-3' 

Hence,  while  the  profits  of  the  International  Harvester  Co. 
on  the  average  for  the  whole  period  of  its  operations  have  not 
been  excessive,  the  profits  for  the  three-year  period,  1909  to 
191 1,  inclusive,  have  been  distinctly  high.  In  judging  of  the 
reasonableness  of  this  rate  of  profit  it  is  proper  to  consider  the 
fact  that  the  risk  of  the  company's  business  is  comparatively 
small,  owing  to  its  world-wide  character,  which  to  a  large  degree 
is  an  insurance  against  the  effects  of  local  disturbances  of  busi- 
ness prosperity.  It  is  also  important  to  bear  in  mind  the  fact 
that  the  business  rests  in  part  on  a  monopolistic  basis,  which  not 
only  tends  to  reduce  the  element  of  risk,  but  also  makes  it  de- 
sirable from  a  public  standpoint  that  the  rate  of  profit  should 
not  be  higher  than  a  reasonable  return  to  the  capital  invested. 

In  the  course  of  operations  a  large  part  of  the  net  earnings 
of  the  company  were  left  in  the  business  and  not  distributed  in 
dividends,  so  that  by  the  end  of  1908  all  original  deficiency  in 
physical  assets,  compared  with  capital  stock,  according  to  the 

iQct.  I. 

2  This  covers  15  months,  but  no  change  has  been  made  for  this  period  nor  for  the 
average  of  all  the  years  on  that  account.  This  is  in  harmony  with  the  company's 
method  of  treatment.  For  an  explanation  of  the  exceptionally  low  earnings  of  1903, 
see  text. 


THE    INTERNATIONAL   HARVESTER   COMPANY      343 

Bureau's  computations,  had  been  wiped  out  and  a  surplus  bal- 
ance established  of  $2,522,298.85.  In  1910  the  capital  stock 
was  increased,  as  already  stated,  to  1^140,000,000,  and  at  the  end 
of  191 1  a  surplus  existed,  according  to  the  Bureau's  computa- 
tions, of  $13,028,443.23,  exclusive  of  good  will.  This  surplus 
may  be  compared  with  the  surplus  shown  by  the  balance  sheet 
of  the  company  for  December  31,  191 1,  of  $23,390,946.90,  which 
is  also  exclusive  of  good  will. 

The  difference  is  the  net  result  of  the  Bureau's  reduction  of 
the  assets  on  the  one  hand  and  its  reduction  of  the  reserves  on 
the  other.  The  Bureau  has  added  nothing  for  subsequent  ap- 
preciation which  doubtless  would  be  necessary  if  a  fair  appraisal 
were  made  at  the  present  time. 

Profits  in  Particular  Lines  and  in  Export  Trade 

A  noteworthy  feature  of  the  business  of  the  company  is  that 
the  rate  of  profit,  whether  on  sales  or  on  investment,  for  the 
highly  monopolistic  Hnes  —  that  is,  grain  and  grass  harvesting 
machines  —  is  very  much  higher  than  the  corresponding  rates 
for  several  of  the  important  new  lines,  such  as  wagons  and 
spreaders,  where  the  company  encounters  a  greater  degree  of 
competition,  and  the  same  is  true  of  twine.  Thus,  the  rate  of 
return  on  wagons,  in  which  the  company's  percentage  of  the  busi- 
ness done  is  as  yet  relatively  low,  is  admittedly  much  less  than 
in  the  monopoHstic  lines ;  and  even  in  manure  spreaders,  where 
the  company  does  approximately  one  half  the  business  in  the 
United  States,  the  profits  are  comparatively  low,  probably  due 
to  the  agressive  sales  policy  adopted  by  the  company. 

Comparing  the  foreign  business  of  the  International  Harvester 
Co.  with  the  domestic  business,  there  are  comparatively  few 
exceptions,  apparently,  to  the  statement  that  the  prices  to  the 
retail  dealer  or  to  the  farmer  are  higher  abroad  than  in  the 
domestic  market.  This  is  due  largely  to  the  fact  that  the  busi- 
ness in  foreign  markets  must  bear  a  large  expense  for  freight 
and  generally  for  duty,  while  the  selling  expenses  likewise  are 
often  high.  The  only  proper  basis  of  comparison  for  the  returns 
to  the  company  is  found  in  the  net  price  received  at  the  factory 


344  TRUSTS,   POOLS  AND   CORPORATIONS 

in  the  United  States,  due  account  also  being  taken  of  the  extra 
cost  of  packing  or  other  extra  costs  of  machines  made  for  ex- 
port. The  company  maintains  that  its  net  returns  on  this  basis 
are  higher  for  the  export  than  for  the  domestic  trade,  but  its 
own  accounts  show  that  this  is  by  no  means  universally  the  case. 

Productive  Efficiency  and  Financial  Resources 

Cost  of  Production.  — The  International  Harvester  Co.,  gener- 
ally speaking,  has  an  advantage  over  independent  manufacturers 
with  respect  to  the  cost  of  production  of  its  machines.  This  is 
especially  marked  in  the  case  of  grain  binders,  the  most  impor- 
tant of  the  harvesting  machines.  Thus  the  average  factory  cost 
of  binders  for  the  International  Harvester  Co.  at  its  domestic 
plants  for  the  two  years,  1910  and  191 1  combined,  was  $56.32, 
and  ranged  from  $54. 1 1  to  $73.78  at  the  different  plants.  While 
the  company  produces  most  of  the  iron  and  steel  required  —  on 
which  its  subsidiary  steel  company  makes  a  very  large  profit  — 
the  cost  of  these  materials  to  its  implement  plants  is  based  on 
prevailing  market  prices,  so  that  its  costs  in  this  respect  are 
comparable  with  those  of  the  independent  producers.  For  the 
four  independent  companies  that  reported  to  the  Bureau  the  cost 
of  their  binders,  the  average  factory  cost  for  the  same  period  as 
computed  from  the  data  reported  by  them  was  $70.83. 

These  figures  of  factory  costs  do  not  take  account  of  general 
and  miscellaneous  expenses,  which  are  not  ordinarily  reckoned 
in  the  costs  of  machines  at  the  factories,  nor  for  a  much  heavier 
selling  expense  which  for  binders  sometimes  amounts  to  $20 
or  even  $25  per  machine.  If  these  expenditures  are  prorated 
over  the  cost  of  production,  both  for  the  International  Har- 
vester Co.  and  the  independents,  the  average  cost  of  binders  for 
the  International  Harvester  Co.  becomes  $58.57,  and  for  the  four 
independents  $76.18. 

A  proper  understanding  of  these  relations  of  cost  of  produc- 
tion to  the  competitive  position  of  the  independent  binder  manu- 
facturers requires  consideration  also  of  the  question  of  selling 
expense.  The  seUing  expense  per  binder  for  the  International 
Harvester  Co.  is  considerably  higher  than  the  average  selling 


THE   INTERNATIONAL   HARVESTER   COMPANY      345 

expense  of  the  independents,  and  this  fact  partly  j^ompensates 
the  latter  for  their  higher  average  costs  of  production.  Never-, 
theless  the  margin  of  profit  between  prices  and  cost  of  produc- 
tion and  selling  expense  combined  is  markedly  lower  for  the 
independents  than  for  the  International  Harvester  Co.  Appar- 
ently the  high  selHng  expense  of  the  International  Harvest  Co. 
is  due  to  the  policy  of  maintaining  a  very  elaborate  selling 
organization,  which  gives  it  a  strong  hold  on  the  trade  and  helps 
to  secure  to  it  a  large  volume  of  business.  Apparently  it  is  the 
company's  policy  thus  to  maintain  an  expensive  selling  organiza- 
tion to  push  the  sale  of  its  goods  rather  than  reduce  prices  on  some 
of  its  most  important  lines,  particularly  harvesting  machines. 

Similarly  in  the  case  of  mowers  and  rakes,  for  which  the 
Bureau  had  sufficient  data  for  comparing  the  costs  of  the  Inter- 
national Harvester  Co.  with  those  of  independents,  it  was  found 
that  the  average  cost  of  manufacture  at  the  plant  of  the  Inter- 
national Harvester  Co.  for  the  years  1910  and  191 1  combined 
was  lower  than  the  average  cost  of  the  independents  reporting. 

The  foregoing  comparisons  of  production  costs  indicate  one 
of  the  most  important  advantages  enjoyed  by  the  International 
Harvester  Co.  The  striking  advantage  it  has  with  respect  to 
cost  of  production  of  binders,  taken  in  connection  with  the  great 
importance  of  this  machine  in  the  farm-implement  trade,  is  one 
of  its  chief  elements  of  power. 

Finajicial  Resources.  —  Another  chief  element  of  strength  of 
the  International  Harvester  Co.  is  the  possession  through  com- 
bination of  large  financial  resources.  This  is  reflected  princi- 
pally in  three  ways :  First,  the  ability  to  reap  the  advantages 
of  large-scale  production  already  described ;  second,  the  ability 
to  carry  a  full  line  and  maintain  an  elaborate  selling  organiza- 
tion ;  third,  the  ability  to  grant  long  terms  of  credit. 

Most  of  the  concerns  which  compete  with  the  International 
Harvester  Co.  are  not  full-line  concerns.  Those  which  make 
harvesting  machines  in  most  cases  do  not  produce  other  lines  to 
an  important  extent.  Again,  most  of  those  which  make  other 
kinds  of  farm  machines  have  only  a  few  lines,  and  sometimes 
only  one.  On  the  other  hand,  there  are  three  large  full-line 
companies,  the  operations  of  which,  in  this  connection,  are  com- 
pared with  the  International  Harvester  Co. 


346  TRUSTS,    POOLS   AND    CORPORATIONS 

Except  possibly  for  the  three  full-line  companies  mentioned 
above,  the  International  Harvester  Co.  enjoyed  a  great  advan- 
tage with  respect  to  the  distribution  of  similar  kinds  of  imple- 
ments, in  so  far  as  the  methods  of  distribution  employed  were 
similar.  There  are  generally  great  differences  in  the  selling  ex- 
pense of  different  kinds  of  machines,  owing  to  different  methods 
and  customs  regarding  sale  and  distribution,  these  being  partly 
due  to  the  technical  requirements  of  the  business.  Custom  has 
generally  established  a  more  elaborate  system  of  distribution  for 
harvesting  machines  than  for  tillage  implements,  while  the  char- 
acter of  the  goods  themselves  and  the  necessity  for  "  setting 
up,"  etc.,  in  the  case  of  harvesting  machines  involves  a  greater 
expense  than  for  most  other  lines.  While  nearly  all  companies 
engaged  in  the  distribution  of  certain  harvesting  machines  utilize 
ah  elaborate  organization  for  distribution,  full-line  companies 
with  great  financial  resources  are,  to  a  considerable  extent, 
able  to  apply  the  same  system  to  other  lines,  such  as  manure 
spreaders,  engines,  and  wagons.  While  this  undoubtedly  in- 
creases their  actual  outlay  for  selling  expense  per  unit  in  these 
hues,  in  so  far  as  they  eliminate  the  jobber,  they  obtain  thereby 
a  higher  price,  generally,  for  the  goods.  Moreover,  they  are 
thereby  enabled  to  obtain  a  much  stronger  hold  on  the  trade ; 
for  example,  by  selling  directly  to  the  local  dealer  instead  of  to 
the  jobber,  and,  furthermore,  by  getting  in  direct  contact  with 
the  farmer,  through  the  employment  of  canvassers  and  other 
salesmen. 

The  granting  of  long  terms  of  credit  was  originally  developed 
in  the  harvesting-machine  industry  on  account  of  the  general 
inability  of  farmers  to  purchase  expensive  machines,  like  binders, 
for  cash,  but  it  has  been  continued,  to  a  certain  extent  at  least, 
as  a  special  means  of  getting  trade  by  those  concerns  which 
had  ample  financial  resources.  Moreover,  it  has  been  extended 
by  them  to  other  lines  of  farm  implements  of  a  less  expensive 
character,  in  which  this  custom  was  not  developed  until  a  com- 
paratively recent  time. 

The  International  Harvester  Co.,  which,  through  combination, 
acquired  extraordinary  financial  resources,  not  only  perpetuated 
the  system  of   selling  harvesting  machines   on   long   terms  of 


THE    INTERNATIONAL    HARVESTER    COMPANY      347 

credit,  but,  more  conspicuously  than  any  other  concern,  has  ex- 
tended this  system  to  its  new  lines.  This  system  of  selling  these 
new  lines  on  long  terms  of  credit  has  made  it  difficult  for  the 
manufacturers  of  such  lines,  except  possibly  other  full-line  con- 
cerns, to  meet  its  competition,  and  is  the  principal  complaint 
which  they  make  regarding  the  present  conditions  of  business. 
Representatives  of  the  International  Harvester  Co.  claim  that 
its  leading  competitors  grant  equally  long  credits  and  declare 
that  its  policy  is  to  develop  as  far  and  as  rapidly  as  possible  the 
system  of  cash  sales,  that  is,  cash  payment  in  the  same  season 
as  the  goods  are  purchased,  and  that  discounts  for  cash  are  al- 
lowed for  this  reason.  While  in  some  locahties  there  has  been 
a  great  increase  in  the  proportion  of  cash  sales,  nevertheless, 
taking  the  business  of  the  International  Harvester  Co.  as  a 
whole,  it  appears  that  the  proportion  of  sales  on  long  credit 
{i.e.,  one  or  more  years)  to  total  sales  was  higher  in  191 1  than 
at  the  beginning  of  business.  This  increase  in  the  proportion 
of  credit  sales  is  partly  due,  at  least,  to  the  application  of  long 
credits  to  the  new  lines  of  goods  for  which  they  were  formerly 
uncommon. 

The  International  Harvester  Co.  is  enabled  to  pursue  this 
policy,  as  already  stated,  because  of  the  large  resources  it  ac- 
quired through  combination,  and  furthermore,  it  has  been  aided 
therein  by  financial  support  of  an  exceptional  character  through 
its  connection  with  J.  P.  Morgan  &  Co.,  its  fiscal  agents.  The 
company  has  also  secured  large  loans  from  John  D.  Rockefeller, 
father-in-law  of  one  of  the  McCormicks. 

Competitive  Methods  of  International  Harvester  Co. 

While,  as  just  shown,  the  main  source  of  the  International 
Harvester  Co.'s  power  was  the  consolidation  of  competing 
manufacturers  and  the  accompanying  increase  in  financial  re- 
sources, the  company's  position  in  the  industry  has  been  main- 
tained to  some  extent  by  objectionable  competitive  methods. 

In  discussing  the  competitive  methods  of  the  company  it 
should  be  recognized  that  some  practices  which  might  be  re- 
garded with  indifference  if  there  were  a  number  of  competitors 


348  TRUSTS,   POOLS   AND   CORPORATIONS 

of  substantially  equal  size  and  power,  may  become  objectionable 
when  one  competitor  far  outranks  not  only  its  nearest  rival, 
but  practically  all  rivals  combined,  as  is  true  of  the  International 
Harvester  Co.  so  far  as  several  of  its  most  important  lines  are 
concerned. 

It  should  also  be  observed  that  during  the  first  two  years  of 
its  operations  the  company  was  badly  organized,  and  that  in- 
stead of  a  harmonious  policy,  "  divisions  "  corresponding  to  the 
five  old  concerns  acquired  were  maintained,  and  that  under  this 
arrangement  various  objectionable  practices  prevailed,  some  of 
which  appear  to  have  been  subsequently  abandoned.  At  the 
same  time  there  has  continued  to  be  a  rather  general  complaint 
among  dealers,  and  competing  manufactures  as  well,  against  the 
methods  employed  by  the  company. 

Among  such  objectionable  competitive  methods  here  dis- 
cussed are : 

(i)  Maintenance  of  bogus  independent  companies  in  the  early 
years  -of  the  company's  operation. 

(2)  Attempts  to  force  dealers  carrying  its  harvesting  machines 
into  carrying  additional  Hnes  or  certain  International  hnes  ex- 
clusively. At  an  earlier  date  the  contracts  of  the  Harvester  com- 
pany contained  an  exclusive  clause  for  harvesting  machines. 

(3)  Efforts  to  secure  an  undue  proportion  of  desirable  dealers 
in  a  given  town  by  giving  only  one  of  its  several  brands  of 
harvesting  machines  to  a  dealer,  thus  tending  to  restrict  the  out- 
let for  competitive  goods. 

(4)  Use  of  "  suggested  price  "  Hsts,  tending  to  influence  the 
final  retail  price ;  earlier  the  contracts  themselves  provided  for 
fixing  of  retail  prices  by  the  company. 

(5)  Occasional  discrimination  in  prices  and  terms. 

(6)  Misrepresentations  by  salesmen  regarding  competitors. 

Pretended  Competition  in  Early   Years 

So  far  as  the  maintenance  of  bogus  independent  companies  is 
concerned,  this  has  already  been  referred  to  in  discussing  the 
acquisitions  of  the  Osborne,  Minnie,  Aultman-Miller  and  Key- 
stone concerns.     The  impropriety  of  continuing  the  operation 


THE    INTERNATIONAL   HARVESTER   COMPANY      349 

of  these  companies  under  the  old  names,  without  disclosing  the 
real  ownership,  after  they  had  been  acquired  by  the  International 
Harvester  Co.,  is  obvious.  Some  of  these  concerns  were  openly 
advertised  as  independent.  It  should  be  repeated  that  in  some 
cases  it  is  alleged  that  the  ownership  was  concealed  merely  to 
facilitate  the  liquidation  of  the  old  concern,  but  the  Bureau  does 
not  regard  this  as  a  justification  of  the  practice. 

Coercion  of  Dealers  to  Iiandle  International  Harvester  Co.  Goods 

Exclusive  Contract.  —  In  1905  and  previous  years  the  Harvester 
company's  usual  commission-agency  contract  contained  substan- 
tially the  following  clause  : 

Said  agent  especially  agrees  not  to  accept  the  agency  for  or  to  be 
interested  in  the  sale  of  any  grain  binder,  header,  corn  binder,  husker 
and  shredder,  reaper,  mower,  stacker,  sweep  rake,  hayrake  or  hay 
tedder,  other  than  those  manfactured  by  the  International  Harvester 
Company,  either  directly  or  indirectly,  nor  to  permit  any  one  acting 
for  him  as  employee,  agent,  or  partner,  so  to  do  while  acting  as  agent 
for  the  said  company  under  this  contract,  and  said  agent  agrees  to 
pay  said  company  on  demand  as  liquidated  damages,  twenty-five 
dollars  for  each  grain  binder,  header,  or  corn  binder ;  fifty  dollars  for 
each  husker  and  shredder ;  ten  dollars  for  each  mower,  reaper,  or 
stacker ;  five  dollars  for  each  sweep  rake,  hayrake,  or  hay  tedder  sold 
in  violation  of  this  paragraph  of  this  contract. 

It  is  obvious  that  the  use  of  this  clause  in  the  contract,  even 
if  not  enforced,  would  have  a  powerful  effect  upon  most  dealers. 

It  is  indicative  of  the  real  intent  of  this  clause  that  it  was 
eUminated  from  the  contract  after  1905,  when  antitrust  proceed- 
ings against  the  company  were  threatened  in  several  States.  In 
fact,  in  Texas  the  use  of  this  clause  was  discontinued  as  early  as 
October,  1902.  On  the  other  hand,  it  should  be  noted  that  this 
clause  was  customary  among  harvesting-machine  companies 
prior  to  the  merger  and  has  been  used  by  some  other  companies 
in  the  implement  trade  even  since  it  was  abandoned  by  the  In- 
ternational Harvester  Co.  It  is  much  more  objectionable,  how- 
ever, when  used  by  a  concern  which  has  a  monopoHstic  position. 

Exclusive  Handling— M^Qx  the  elimination  of  the  exclusive 


350  TRUSTS,   POOLS  AND   CORPORATIONS 

clause  from  dealers'  contracts,  other  means  were  not  infrequently 
employed  to  secure  the  same  end.  In  a  considerable  number  of 
instances  reported  to  the  Bureau,  salesmen  of  the  International 
Harvester  Co.  endeavored  to  prevent  the  handling  of  a  competi- 
tor's line  by  threats  to  discontinue  the  dealer's  agency  for  the 
International  Harvester  Co.'s  machines,  and  in  some  instances 
canceled  or  discontinued  the  dealer's  agency  v^hen  he  insisted 
upon  handling  an  independent  line.  The  company  asserts,  how- 
ever, that  such  practices  are  contrary  to  its  policy. 

"  Full-line  "  Forcing.  —  This  complaint  was  a  rather  general 
one  among  the  dealers  interviewed.  Obviously  it  is  difficult  to 
say  just  where  this  practice  of  trying  to  force  dealers  to  take 
additional  kinds  of  products  ceases  to  be  legitimate  competition 
and  becomes  objectionable.  The  International  Harvester  Co., 
like  any  other  concern,  desires  to  push  the  sale  of  its  goods,  and 
naturally  is  disposed  to  take  advantage  of  the  fact  that  it  has 
certain  desirable  machines,  in  order  to  force  the  sale  of  its  newer 
lines.  Aside  from  any  question  as  to  motive,  it  is  apparent  that 
any  concern  having  a  monopoly  of  such  an  article  as  harvesting 
machinery  has  an  enormous  advantage  in  forcing  its  entrance 
into  new  fields,  and  that  this  advantage  is  very  susceptible  of 
abuse.  There  were  numerous  complaints  that  the  salesmen  of 
the  company  attempted  to  force  dealers  to  take  on  lines  in  addi- 
tion to  those  already  handled,  frequently  under  penalty  of  loss 
of  their  agencies  for  the  company's  harvesting  machines.  Fre- 
quently, however,  it  appeared  that  these  threats  were  not  carried 
out. 

Effort  to  secure  Undue  Proportion  of  Dealers 

As  a  rule  there  are  not  more  than  three  dealers  in  farm 
machinery  in  an  ordinary  town  in  the  grain  States.  It  is  the 
policy  of  the  International  Harvester  Co.,  in  general,  to  allow  a 
given  dealer  to  handle  only  one  of  its  several  brands  of  harvesting 
machines,  thus  absorbing  the  services  of  a  large  number  of  these 
dealers ;  of  course,  not  all  of  the  company's  brands  are  handled 
in  every  town.  Complaint  is  made  that  this  tends  to  give  it 
such  an  undue  proportion  of  dealers  as  to  restrict  the  outlet  for 
competitors'  goods.     The  company,  however,  expressly  denies 


THE    INTERNATIONAL   HARVESTER   COMPANY      351 

that  in  adopting  this  poUcy  of  distributing  its  brands  it  is  actu- 
ated by  any  desire  to  handicap  its  competitors  in  this^ay.  The 
company's  position  on  this  point  is  illustrated  by  the  following 
excerpt  from  testimony  of  the  ^assistant  general  manager  to  the 
Bureau  : 

Q.  I  understand  then  that  your  position  is  that  the  company  does 
not  place  its  brands  in  this  way  for  the  purpose  of  handicapping  its 
competitors  ;  and  you  also  contend  that,  regardless  of  intent,  the  prac- 
tical effect  is  not  to  handicap  your  competitors?  —  A.  It  does  not. 
Its  sole  purpose  is  to  get  more  active  representation  of  your  goods, 
which  you  cannot  do  if  you  allow  them  to  get  into  the  hands  of  one 
man  in  a  town.  He  will  not  give  your  customers  the  same  considera- 
tion, the  same  service,  as  he  will  if  he  is  handling  a  less  number.  Not 
only  do  we  not  try  to  eliminate  them  in  that  way,  but  it  is  a  matter  of 
real  benefit  to  us  in  new  sections  when  a  competitor  will  get  a  real 
live,  active  man  in  the  trade.  We  sell  more  goods  than  we  could  do 
if  we  gave  all  our  lines  to  one  man  and  there  was  not  any  competitor 
there. 

However,  it  seems  significant  that  the  record  in  the  Govern- 
ment suit  shows  that  in  1903  a  report  of  the  sales  committee  of 
the  International  Harvester  Co.  of  America,  which  was  approved 
by  the  executive  committee,  contained  the  following  statement : 

We  believe  that  so  long  as  there  is  competition  it  is  desirable  for 
the  International  Harvester  Co.  to  maintain  five  selling  organizations 
for  the  purpose  of  getting  the  largest  amount  of  effort  from  the  greatest 
number  of  local  agents  without  expense  to  the  company,  and  for  the 
purpose  of  utilizing  in  its  own  business  as  much  as  possible  of  the 
available  local  agency  material  rather  than  permit  any  of  it  to  become 
available  for  competitors. 

Still  again,  in  1902,  when  the  exclusive  contract  was  discon- 
tinued in  Texas,  the  executive  committee  of  the  International 
Harvester  Co.  of  America  directed  each  division  of  the  company 
"  to  discourage  any  agent  in  Texas  from  handling  more  than  one 
brand  of  machine." 

These  official  statements  seem  to  show  conclusively  that  the 
distribution  of  brands  among  various  dealers  in  the  manner  in- 
dicated was  at  one  time  the  result  of  a  settled  policy  of  the 
company  to  secure  as  many  of  these  dealers  as  it  could  for  its 


352  TRUSTS,  POOLS  AND   CORPORATIONS 

own  business,  and  with  a  view  to  embarrassing  competitors.  In 
view  of  these  official  statements,  the  fact  that  the  company  still 
distributes  its  brands  in  this  way  seems  significant.  Practically, 
the  supply  of  dealers  even  in  the  smaller  towns  usually  has  been 
sufficient  to  prevent  anything  like  an  effective  monopoly  of  these 
channels  of  distribution,  although  it  does  appear  that  the  com- 
pany's practice  in  this  respect  has  to  some  extent  handicapped 
its  competitors. 

Issue  of  '^  Sjiggested-pricc"  Lists 

Formerly  the  commission  agency  contracts  of  the  International 
Harvester  Co.  expressly  provided  for  the  maintenance  of  retail 
prices  fixed  by  the  company.  In  recent  years,  however,  this 
clause  has  been  omitted  from  these  contracts,  and  the  company 
now  expressly  disclaims  any  attempt  to  control  the  retail  price 
charged  by  the  dealer.  The  position  of  the  International  Har- 
vester Co.  is  that  dealers  in  farm  machinery  are  not  strictly  its 
agents,  although  generally  so  called,  but  that  they  are  free  to  do 
as  they  like  in  the  matter  of  prices,  subject  to  the  right  of  the 
company  to  cease  dealing  with  them  if  they  adopt  methods  which 
tend  to  injure  its  business  or  demoralize  the  trade. 

The  Bureau  found,  however,  that  following  the  elimination 
from  the  company's  contracts  of  the  clause  relating  to  retail 
prices  there  has  been  a  rather  general  issuance  of  price  lists  in 
different  parts  of  the  country,  usually  by  general  agents  of  the 
company,  naming  so-called  "  suggested  prices  "  to  be  paid  by  the 
farmer.  These  price  lists  are  sometimes  gotten  out  in  rather 
elaborate  form,  and  over  the  name  of  the  International  Harvester 
Co.  of  America,  and  they  have  had  a  rather  wide  circulation 
among  dealers.  Representatives  of  the  Bureau  found  that  such 
price  lists  had  been  issued  by  several  general  agencies  of  the 
company  in  recent  years. 

The  assistant  general  manager  of  the  company  explained  these 
price  lists  on  the  ground  that  there  was  a  constant  demand  on 
the  part  of  the  company's  salesmen  for  suggested  prices,  largely 
as  a  matter  of  information  for  the  benefit  of  final  purchasers 
who  frequently  made  requests  for  quotations.  In  this  connec- 
tion he  said : 


THE   INTERNATIONAL   HARVESTER   COMPANY      353 

There  is  a  constant  demand  on  the  part  of  our  salesmeik^or  these 
suggested  prices.  .  .  .  Some  of  our  men  have  been  stupid  enough 
—  indiscreet  enough  —  to  comply  with  this  request  to  the  extent  of 
getting  out  a  "  suggested  Hst."  I  may  say,  however,  in  justice  to 
them  that  there  was  a  period  along  about  1904-5  when  that  was 
recognized  by  our  counsel  at  the  time  as  not  being  objectionable. 
Later  instructions  were  issued  not  to  do  it,  as  it  led  to  a  misunder- 
standing as  to  what  our  motives  were. 

It  is  obvious  that  the  company  could  immediately  stop  the 
issuance  of  such  lists  if  it  genuinely  desired  to  do  so. 

The  company's  position  is  that  these  lists  have  no  effect  and 
are  not  intended  to  have  any  effect  in  the  direction  of  maintain- 
ing uniform  retail  prices.  The  Bureau,  however,  is  of  the 
opinion  that  the  distribution  of  these  lists  tends  to  the  main- 
tenance of  more  uniform  retail  prices  by  deterring  dealers  from 
making  concessions. 

Local  DiscrimtJiation  in  Prices  and  Terms 

The  general  policy  of  the  International  Harvester  Co.  is  one 
of  uniform  prices  to  dealers.  Complaints  were  submitted  to  the 
Bureau,  however,  to  the  effect  that  at  times  it  engages  in  local 
price  cutting  for  purposes  of  competition.  Admissions  of  the 
company  show  that  moderate  concessions  are  rather  frequent. 
The  Bureau  found  a  large  number  of  such  moderate  concessions 
and  also  a  limited  number  of  deep  cuts,  but  the  company  itself 
admitted  such  deep  cuts  in  only  a  very  few  instances.  The 
company  specifically  denied  that  its  policy  is  to  make  deep  cuts 
to  injure  competitors.  It  is  obviously  difficult  to  say  just  where 
moderate  concessions  in  prices  cease  to  be  an  ordinary  incident 
of  competition  and  become  subject  to  condemnation.  It  should 
be  noted  that  the  laws  of  several  States  in  which  the  Interna- 
tional Harvester  Co.  does  business  specifically  provide  against 
local  discrimination  in  prices.  However,  the  Bureau  is  of  the 
opinion  that  such  discrimination  in  prices  has  not  had  a  serious 
effect  on  the  business  of  competitors. 

It  may  be  pointed  out  that  in  some  of  its  newer  lines  the  com- 
pany has  adopted  a  general  policy  of  distinctly  low  prices,  which 


354  TRUSTS,   POOLS  AND   CORPORATIONS 

apparently  it  is  enabled  to  do  because  of  the   high   prices  it 
secures  on  the  older  lines. 

In  this  connection  there  is  much  complaint  that  the  company 
grants  unusually  long  terms  of  credit  to  purchasers  of  some  of 
these  newer  lines.  One  of  the  competitors  of  the  company  said, 
"The  International  Harvester  Co.  sells  terms,  not  harrows." 
Other  complaints  as  to  the  company's  terms  were  made  espe- 
cially with  respect  to  manure  spreaders,  wagons,  and  gasohne 
engines.  The  advantage  of  the  Harvester  company  in  this 
respect,  because  of  its  superior  resources,  is  referred  to  else- 
where. This,  however,  is  a  matter  distinct  from  local  discrimi- 
nation, although,  in  the  opinion  of  the  Bureau,  it  is  more  serious 
in  its  effect  on  competitors  in  the  new  lines,  where  the  propor- 
tion of  the  company's  business  has  been  rapidly  increasing. 

Misrepresentations  Regarding  Competitors 

Complaint  was  also  made  to  the  Bureau  that  there  has  been 
more  or  less  general  misrepresentation  of  competitors  by  the 
salesmen  of  the  International  Harvester  Co.  While  some  years 
ago  there  were  a  few  such  complaints  involving  misrepresenta- 
tion of  the  financial  standing  of  competitors  by  the  company's 
salesmen,  no  recent  complaints  on  this  score  were  received. 

In  the  opinion  of  the  Bureau  there  is  foundation  for  this 
complaint,  but  apparently  the  practice  has  not  resulted  in  seri- 
ously handicapping  competitors. 

While  notwithstanding  the  various  objectionable  practices 
above  set  forth  the  business  of  the  competitors  of  the  Interna- 
tional Harvester  Co.  in  harvesting  machines  has  increased, 
obviously  this  is  no  defense  of  methods  in  themselves  objec- 
tionable. Moreover,  as  already  shown,  the  International  Har- 
vester Co.  has  thus  far  substantially  maintained  its  monopolistic 
position  in  the  harvesting-machine  business,  while  in  several  of 
the  newer  Hnes  in  which  it  had  no  interest  at  its  organization  it 
has,  in  a  short  period  of  years,  built  up  its  business  so  rapidly 
that  in  some  of  these  it  now  has  a  large  proportion  of  the  trade, 
and  in  one,  manure  spreaders,  a  majority  of  the  business.  It  is 
also  worth  noting  that  the  company's  business  in  wagons  has 
increased  rapidly  in  the  face  of  a  reduction  in  the  total  demand. 


THE    INTERNATIONAL   HARVESTER    COMPANY      355 

Sources  of  the  Combination's  Power 

Three  principal  factors  appear,  therefore,  to  have  been  chiefly 
responsible  for  the  position  attained  by  the  International  Har- 
vester Co.:  (i)  Combination  of  competitors;  (2)  superior  com- 
mand of  capital;  (3)  certain  objectionable  competitive  methods. 

The  prime  source  of  the  company's  power  is  undoubtedly  to 
be  found  in  the  original  combination  of  the  principal  competing 
companies  in  the  harvesting-machine  business.  As  already 
shown,  the  company  was  also  able  to  use  its  position  in  this 
branch  to  great  advantage  in  forcing  its  way  into  new  lines. 

Next  to  this  monopolistic  control  of  the  harvesting-machine 
business  proper  is  the  company's  exceptional  command  of 
capital. 

While  its  financial  advantage  has  been  supplemented  by  the 
adoption  of  certain  objectionable  competitive  methods,  the  main- 
spring of  its  power  was  the  consolidation  of  the  leading  competi- 
tive factors  in  the  industry. 


X 


THE  CAPITALIZATION   OF  THE   INTERNATIONAL 
MERCANTILE    MARINE   COMPANYi 

THE  International  Mercantile  Marine  Company  completed, 
on  December  31,  1903,  its  first  year  of  life  as  a  going 
concern.  Up  to  the  date  of  this  writing,  if  stock  quotations  are 
any  indication  of  its  financial  condition,  the  success  of  the  com- 
pany, from  a  market  standpoint,  is  problematical.  Its  preferred 
stock  is  quoted  at  18  and  its  common  stock  at  5,  prices  which 
indicate  a  general  conviction  that  the  equity  in  the  company  is 
worth  little.^ 

There  is,  however,  a  possibility  that  the  stock  market  may  be 
mistaken  in  its  estimate  of  Mercantile  Marine.  In  a  declining 
market,  stock  values  are  influenced  more  strongly  by  the  financial 
necessities  of  holders  than  by  the  earning  power  of  the  companies 
whose  ownership  they  represent.  This  is  especially  true  of  the 
stocks  of  corporations  launched  on  a  declining  market  where  the 
influence  of  every  adverse  factor  is  exaggerated.  International 
Mercantile  Marine  has,  in  this  respect,  been  pecuharly  unfor- 
tunate. It  was  brought  out  during  the  fall  of  1902,  when  the 
decline  in  the  market  was  in  full  swing,  and  after  the  public  buy- 
ing power  had  been  exhausted.  Under  the  circumstances,  these 
securities  had  no  chance  of  a  favorable  reception.  Moreover, 
almost  from  the  start  they  were  subject  to  inside  pressure.  The 
English  venders,  stimulated  by  some  natural  distrust  of  the 
unknown  economies  of  combination,  and  strenuously  exhorted 
thereto  by  the  financial  press  of  Great  Britain,  which  has  been 

1  From  the  Political  Science  Quarterly,  Vol.  XIX,  1904,  pp.  50-65. 

2  Receivership  ensued  at  last  in  191 5.  The  reorganization  plans,  now  under  dis- 
cussion, propose  to  reduce  the  total  of  outstanding  securities  by  one  half.  —  Ed. 

356 


THE    MERCANIILE    MARINE    COMPAxNY  357 

from  the  outset  hostile  to  the  combination,^  sold  the  stock  which 
they  received  in  payment  for  their  interest,  and  the  nrtmbers  of 
the  American  underwriting  syndicate,  as  well  as  the  American 
vendors,  hard  pressed  by  the  continued  stringency  in  the  money 
market,  have  contributed  to  the  selling  pressure. 

The  proposition  should  be  considered  on  its  merits,  without 
special  reference  to  the  market  price  of  the  company's  securities. 

The  outstanding  capital  of  the  Mercantile  Marine  Company 
is  divided  as  follows  : 

Underlying  bonds           ........  ^16,000,000 

20-year  collateral  debenture  bonds  (4J  per  cent)  .         .         .  52,000,000 

Preferred  stock,  cumulative  (6  per  cent)        ....  54,600,000 

Common  stock       .........  48,000,000 

Total ^170,600,000 

To  pay  interest  and  preferred  dividends  —  common  dividends, 
at  least  for  some  years  to  come,  are  hardly  to  be  expected  — 
will  require  the  following  amounts  : 

Interest  on  underlying  bonds,  taken  at  5  per  cent  .         .         .  $    800,000 

Interest  on  debentures'    ........  2,340,000 

Dividends  on  preferred  stock           ......  3,276,000 

Total ^6,416,000 

Following  the  practice  of  the  older  German  and  English  com- 
panies and  allowing  60  per  cent  of  net  earnings  for  depreciation, 
insurance,  and  renewals,  the  total  requirements,  letting  these 
funds  include  the  sinking  fund,  are  $16,000,000.^ 

1  For  example,  the  Economist  on  Nov.  29,  1902,  referring  to  the  report  that  cer- 
tain English  vendors  had  expressed  a  desire  to  receive  bonds  in  lieu  of  cash,  re- 
marked as  follows  :  "  They  (J.  S.  Morgan  and  Co.)  also  state  that  the  offer  was  made 
on  the  expressed  desire  of  some  shareholders,  who  wished  to  invest  in  the  bonds. 
If  that  be  the  case,  it  seems  to  imply  a  singular  lack  of  business  capacity  on  the  part 
of  the  vendor  shareholders,  since  they  need  not  seek  far  to  find  securities  with  a  much 
greater  margin  of  security  than  these  bonds  to  return  a  higher  rate  of  interest.  All 
they  do  know  is  that  its  capitalization  will  be  enormously  in  excess  of  that  of  the 
undertakings  that  have  been  absorbed  in  it,  and  none  should  be  better  aware  than 
themselves  of  the  difficulty  that  will  be  met  with  in  earning  dividends  on  such  a  large 
sum,  since  they  have  had  the  experience  of  the  same  difficulty  with  a  much  smaller 
capitalization." 

^  The  bonds  of  the  International  Navigation  Company,  of  which  $13,686,000  are 
outstanding,  call  for  a  sinking  fund  of  $250,000  to  $500,000  annually,  beginning 
May  I,  1905,  which  will  retire  the  bonds  at  maturity  in  1929.     No  sinking  fund  is 


358 


TRUSTS,    POOLS   AND    CORPORATIONS 


Shortly  after  the  Mercantile  Marine  Company  was  organized, 
the  statement  was  made,  unofificially,  but  apparently  on  good 
authority,  by  the  Wall  StvQQtJou7'nal,  that  the  average  net  earn- 
ings of  the  different  fleets  for  four  years  were  $6,107,675,  The 
same  authority  stated  that  the  estimated  savings  in  the  cost  of 
operation  for  the  year  were  $10,000,000.  Adding  these  to  the 
average  profits  above  mentioned,  the  earnings  of  1903  should 
have  amounted  to  a  sum  sufficient  to  pay  dividends  on  the  pre- 
ferred stock,  although  it  was  not  expected  that  any  disbursement 
would  be  made.  In  other  words,  accepting  the  corporation's  own 
estimate  of  the  economies  which  can  be  secured  by  its  changes 
in  administration,  the  amount  of  its  earnings  falls  short  of  the 
amount  necessary  to  pay  dividends  on  the  common  stock. 

Before  proceeding  further  in  the  analysis,  let  us  test  the  ac- 
curacy of  this  conjectural  estimate  by  comparing  these  figures 
with  the  amount  actually  earned  by  other  companies  during 
1902,  a  year  which  was  more  favorable  for  the  shipping  industry 
than  1903.    Such  a  comparison  is  presented  in  the  following  table  : 


Tonnage 


Net  Earnings 


Net 
Earnings 
PER  Ton 


Cunard  Company 

North  German  Lloyd  .... 
Hamburg-American  .... 
International  Mercantile  Marine 


114,410 

583,042 

651,151 
1,034,884 


$  1,235,750 
4,392,500 
4,458,198 
16,107,000  (est.) 


310.80 

7-53 
6.85 

15-57 


It  thus  appears  that  the  estimated  tonnage  earnings  of  the 
Shipping  trust  for  1903  are  nearly  twice  the  average  amount  — 
$8.39  —  which  was  earned  during  the  preceding  year  by  its  lead- 
ing competitors.  Moreover,  the  German  companies  have  for 
many  years  operated  under  a  close  pool  which  secures  them  all 
of  the  economies  which  the  Shipping  trust  was  organized  to 
obtain.  Unless  some  other  factors  shall  be  discovered  by  the 
combination  to  increase  its  earnings,  these  preliminary  estimates 
will  eventually  require  some  revision, 

provided  for  the  bonds  of  the  International  Mercantile  Marine  Company,  but  they 
are  subject  to  call  at  105  after  five  years.  If  an  adequate  reserve  is  provided,  the 
necessity  of  a  sinking  fund  on  bonds  secured  by  shipping  property  does  not  appear. 


THE    MERCANTILl-:    MARINE    COMPANY  359 

Accepting  the  same  figure  of  tonnage  earnings  for  the  Ship- 
ping trust  which  was  attained  in  1902  by  its  competitors, 
namely  $8.39  per  ton,  we  have  next  to  inquire  how  the  com- 
bination measures  up  to  its  interest  and  dividend  requirements. 
The  net  earnings  of  the  company,  on  this  basis,  would  stand  at 
$8,941,398,  leaving  $5,801,398  over  fixed  charges,  for  deprecia- 
tion, renewals,  and  replacements.  This  amounts  to  about  $5.60 
per  ton  as  compared  with  $4.30  per  ton  for  the  Hamburg- 
American  line  in  1902,  $6.19  for  the  North  German  Lloyd, 
and  S8.04  for  the  Cunard  line.  If  we  debit  the  earnings  of 
the  International  Mercantile  Company  with  $5.00  per  ton  for 
these  various  necessary  expenses,  an  amount  which,  considering 
the  age  of  their  fleet  and  the  necessity  of  providing  for  the 
redemption  of  their  bonds,  would  seem  to  be  no  more  than  is 
required,  and  if  we  assume,  as  before,  their  tonnage  earnings  at 
$8.39  per  ton,  the  Trust  has  only  $606,978  remaining  for  its  pre- 
ferred stockholders.  That  this  supposition  is  not  wide  of  the 
truth,  may  be  seen  from  the  experience  of  the  North  German 
Lloyd  Company  in  1902,  which  earned,  over  interest,  14,770,000 
marks,  and  credited  to  renewals  and  insurance  all  but  212,477 
marks  of  this  amount,  reducing  their  dividend  payments  from 
5,278,131  to  210,623  marks.  Taking  a  three  years'  average  of 
the  earnings  of  the  Cunard,  Hamburg- American,  and  North 
German  Lloyd  companies,  we  find  that  their  combined  depre- 
ciation and  insurance  charges  amount  to  $24,719,112  out  of 
$37,976,794  of  net  earnings,  or  about  65  per  cent.  It  is  impos- 
sible to  escape  the  conclusion  that  the  Shipping  trust  must  ap- 
propriate a  similar  proportion  of  its  profits  for  the  service  of  the 
company,  if  the  first  care  of  its  management  is  for  the  property 
of  the  company.  If  this  is  done,  however,  a  readjustment  of 
the  capital  of  the  company  is  among  the  probabilities. 

We  have  not  reached  the  end  of  the  chapter.  The  Shipping 
trust  was  organized  during  a  period  of  great  prosperity,  when 
the  earnings  of  ocean  transportation,  although  depressed  some- 
what below  the  abnormal  figures  of  1900,  were  still  large.  To 
pass  final  judgment  upon  its  financial  future,  it  is  necessary  that 
we  cast  backward  and  discover,  if  possible,  from  the  history  of 
other  shipping  companies,  what  may  be  expected  if  earnings 
follow  the  course  of  former  years. 


36o 


TRUSTS,    POOLS   AND    CORPORATIONS 


In  the  accompanying  table  appears  the  income  account  of 
the  Cunard  Company  for  a  period  of  twenty  years,  including 
1883  and  1902. 

CUNARD    STEAMSHIP   LINE 


Year 

Profits, 

Including 

Balance 

Forward 

Reserved 
for 

Deprecia- 
tion 

Reserved 

FOR 

Insurance 

Total 
Balance 

Dividends 

Forward 

Insurance 

Fund 
Stands  at 

£ 

£ 

£ 

£ 

£ 

£ 

I,  Often 
Written  lb. 

1902 

263,617 

158,722 

24,686 

68,808 

64,000  (4%) 

4,807 

357,000 

1901 

226,022 

167,900 

5,766 

65,984 

64,000  (4  %) 

1,984 

350,000 

1900 

553,241 

284,488 

119,037 

143,434 

128,000  (8%) 

15,434 

350,000 

1899 

294,856 

173,223 

34,247 

83,527 

80,000  (5  0/,) 

3,527 

260,000 

1898 

261,691 

172,169 

29,496 

57,663 

56,000  (31  %) 

1,663 

235,000 

1897 

222,475 

166,938 

27,999 

41,691 

40,000  (2i  %) 

1,691 

212,000 

1896 

249,788 

184,822 

32,417 

42,181 

40,000  (2i  %) 

2,l8l 

202,000 

1895 

144,305 

180,325 

183,731^ 

...      I 

deb.  int.  "t 
1,466/ 

187,000 

1894 

94,953 

177,104 

.  .  . 

183,0202 

.    .    . 

2,072 

230,000 

1S93 

200,09 1 

154,419 

39,966 

35,8683 

32,000   (2  "/,) 

3,868 

322,000 

1892 

174,607 

125,856 

33,496 

36,296^ 

32,000   (2  %) 

4,296 

317,500 

189I 

220,991 

125,426 

38,407 

52,382 

48,000  (3  %) 

4,382 

315,000 

1890^ 

246,601 

125,840 

43,144 

72,838 

64,000  (4  %) 

8.838 

280,000 

1889 

350,203 

130,573 

{41,9181 
1 54,480  / 

175,469 

96,000  (6%) 

4,988 

240,000 

18886 

314,736 

1 135,327 
I  23,000 

46,815 1 
40,472  / 

130,172 

64,000  (4  %) 

2,700 

Debenture 

debt  re- 

1887 

254,482 

135,500 

77,839 

41,143 

40,000  (2I  %) 

1,143^ 

duced  from 

;£45o,ooo 

to  ;{;96,ooo 

Loss  of 

1886 

160,910 

137,721 

23,189 

nothing 
left 

nothing  left 

Oregon 
costs 

1885 

165,943 

141,506 

24,437 

nothing 
left 

nothing  left 

140,000 

1884" 

103,948 

/  87,018 
1 23,000 

nothing 
left 

nothing 
left 

}    •■• 

1 1  7,000 

1883 

146,920 

93,134* 

50,094 

none 

1,270 

150,094 

1  ^39,426  from  insurance  fund.  "'  ^^88,067  from  insurance  fund. 

3  ^^30,000  from  insurance  fund.  *  ^25,000  from  insurance  fund. 

5  The  company  had  on  hand  at  the  end  of  1890  in  investments,  bills,  and  cash, 

/559,922. 

6  ^96,000   debentures   paid    off  July    1st.      Balance    of  cash   and   investments, 

^^205,804.  _ 

■?  ;^23,ooo  taken  from  insurance  fund  and  added  to  sum  reserved  for  depreciation. 
8  Depreciation  fund  stands  at  ;,f  302,000. 


THE    MERCANTILE    MARINE    COMPANY  361 

The  feature  of  the  movement  which  will  immediately  impress 
the  reader  is  the  extraordinary  fluctuations  of  neW«arnings. 
From  a  minimum  of  ^103,948  in  1884,  they  rose  to  a  maximum 
of  ;^350,203  in  1889,  an  increase  of  237  per  cent.  From  that 
point,  although  fairly  maintained  until  1893,  they  fell  in  1894  to 
;!^94,953,  the  smallest  figure  ever  reached.  The  depression  con- 
tinued during  1895,  but  in  1896  began  the  great  upward  swing 
which  carried  earnings  up  more  than  550  per  cent,  to  the  enor- 
mous total  of  ^553,241  in  1900.  From  this  maximum,  the 
decline  was  rapid,  profits  standing  at  ;£226,022  in  1901,  and 
^{^263, 61 7  in  1902.  Passing  over,  for  the  time  being,  the  explana- 
tion of  these  remarkable  fluctuations,  let  us  examine  the  dis- 
position of  profits  which  this  company  employed.  We  note  at 
once  that  the  reserves  for  depreciation  took  up  a  large  share : 
;^3, 104,01 1  out  of  a  total  of  ;^4,650,38o.  Another  large  amount, 
;^787,905,  or  i6|  per  cent  of  the  total,  went  to  the  insurance 
fund,  which  the  company  has  always  maintained  at  a  high  figure. 
Out  of  the  surplus  remaining,  to  which  was  added  p^  182,493 
from  the  insurance  fund,  bringing  the  total  amount  available  for 
distribution  up  to  ^940,957,  ^848,000  was  paid  in  dividends, 
leaving  ;!^93,957  to  be  carried  forward,  an  amount  successively 
included  in  the  annual  profits.  In  other  words,  out  of  ;£4,650,38o 
of  profits  earned  in  20  years,  the  Cunard  Company  paid  out 
^^848,000,  or  18.8  per  cent  to  its  owners,  and  kept  81.2  per  cent 
in  the  business.  We  note,  moreover,  that  the  disbursement  of 
dividends  was  by  no  means  regular.  In  six  years  out  of  the 
twenty,  nothing  was  paid  on  the  stock.  In  five  other  years,  less 
than  3  per  cent  was  paid,  and  in  only  one  year,  1900,  was  as 
much  as  8  per  cent  distributed  to  stockholders. 

We  note  also  with  what  extreme  care  the  directors  guarded 
their  insurance  and  depreciation  funds,  taking  every  occasion  of 
large  earnings  to  build  up  these  safety  deposits,  and  refusing  to 
sacrifice  to  the  temporary  advantage  of  the  owners  the  permanent 
welfare  of  the  company.  In  thirteen  years  out  of  the  twenty, 
the  profits  of  the  company  exceeded  ^200,000,  aggregating 
v^3>658,794.  Of  this  amount  only  ;!^8 16,000  was  paid  in  divi- 
dends, ^2,842,794  being  carried  to  reserve.  The  shareholders 
reaped  no   small  benefits,  however,  from   their  enforced   self- 


362  TRUSTS,    POOLS   AND   CORPORATIONS 

denial.  In  four  years  of  the  period  1892-95,  the  insurance  fund, 
which  is  held  in  cash  and  securities,  was  drawn  upon  for  divi- 
dends or  to  maintain  the  depreciation  fund.  Of  the  ;^64,ooo 
paid  out  to  stockholders  during  these  four  years,  >{^5  5,000  came 
from  the  reserves. 

In  short,  it  was  only  by  the  most  careful  economy,  by  the 
utmost  prudence  and  conservatism  in  the  distribution  of  profits, 
that  the  Cunard  Company  was  able,  over  a  twenty-year  period, 
to  average  2.6  per  cent  to  its  stockholders  and,  during  the  past 
ten  years,  to  earn  3.1  per  cent  on  a  capital  which  at  no  time 
exceeded  the  book  value  of  its  ships. 

For  an  explanation  of  the  irregularity  of  these  profits,  we  turn 
to  the  nature  of  the  industry.  The  shipping  business  is,  of  all 
industries,  the  most  irregular.  It  is  liable  not  merely  to  the 
usual  alternations  of  prosperity  and  depression,  but  to  sudden 
fluctuations  of  rates  and  traffic  which  are  entirely  without  parallel 
in  any  other  branch  of  trade. 

To  begin  with,  the  industry  is  strictly  competitive.  The  high 
seas  can  never  be  monopolized.  Dockage  facilities  in  the  lead- 
ing countries  are  open  to  the  ships  of  all  the  world,  and  ship- 
yards will  furnish  a  cargo  steamer  at  a  moderate  price.  Under 
these  conditions,  a  permanent  control  of  the  shipping  industry, 
sufficient  to  maintain  rates  or  to  control  traffic,  is  out  of  the 
question.  Agreements  among  the  regular  lines  may  introduce  a 
certain  degree  of  stability  into  passenger  rates,  and  into  the 
freight  charges  on  the  higher  classes  of  commodities,  but  for  the 
great  mass  of  traffic,  the  raw  materials  and  rough  and  half- 
finished  products  of  commerce,  carriers  and  shippers  will  con- 
tinue, as  they  have  from  time  immemorial,  to  make  their  individual 
bargains,  and  the  rates  of  charge  will  continue  to  be  fixed  by  the 
higghng  of  the  market. 

This  situation  has  two  consequences.  If  at  any  port  the  sup- 
ply of  shipping  waiting  for  cargoes  exceeds  the  amount  of  busi- 
ness offered,  the  competition  between  owners  will  force  rates 
down  sometimes  to  the  smallest  admissible  margin  above  operat- 
ing expenses.  The  amount  asked  by  the  marginal  ship  will  fix 
the  rate  for  the  time  being  for  all  vessels  leaving  the  port.  On 
the  other  hand,  a  small  excess  of  tonnage  offered  will  have  an 


THE    MERCANTILE   MARINE   COMPANY  363 

equal  effect  in  raising  the  rate.  Some  classes  of  commodities 
can  be  delayed  in  shipment  longer  than  others,  and  some  vessel 
owners  can  afford  to  lay  up  a  portion  of  their  tonnage  rather 
than  accept  unremunerative  rates.  Generally  speaking,  how- 
ever, the  rule  holds  good.  From  every  port  and  on  every  line 
of  traffic,  the  rates  are  constantly  changing  in  a  way  which  would 
stagger  a  railway  traffic  manager,  although  he  was  deeply  versed 
in  the  theory  and  practice  of  rebates  and  special  concessions. 

For  example,  take  the  following  table  of  outward  rates  on 
coal  from  Wales  to  various  ports  in  1899 : 

Per  Cent  of 
s.  d.  s.  d.  Variation 

Port  Said 7  9  to  13  6  74 

Genoa 7  6  to  11  47 

Aden 11  6  to  16  6  43 

Bombay 12  to  18  6  54 

Colombo 12  to  19  59 

Cape  Town 19  to  30  58 

Rio  Janeiro 11  6  to  16  39 

The  movement  of  grain  rates  from  the  United  States,  while  less 
irregular  than  the  figures  quoted  above,  is  also  subject  to  wide 
variations. 

Examples  of  more  extreme  fluctuations  are  easy  to  find.  The 
course  of  rates  in  the  British  market  in  1896  offers  a  typical  illus- 
tration of  the  extreme  instability  of  ocean  rates.  The  Economist, 
in  its  annual  review  of  the  shipping  industry  for  1895,  reported, 
at  the  close  of  that  year :  "  The  tonnage  afloat  is  enormously  in 
excess  of  the  world's  requirements,  and  so  long  as  this  continues 
we  cannot  see  that  there  will  be  an  improvement."  During  the 
early  part  of  1896,  this  condition  of  extreme  depression  con- 
tinued. Only  in  outbound  rates  to  the  East,  where  the  China- 
Japan  troubles  made  a  brisk  demand  for  shipping,  was  any 
profit  presented.  These  rates  advanced,  and  remained  on  a  high 
level  throughout  the  year.  A  large  number  of  ships,  finding  no 
profitable  employment  at  home,  went  out  to  the  East.  Once 
there,  however,  and  the  war  ended,  they  could  not  get  back  again, 
for  return  freights  were  not  to  be  had,  and  it  was  impossible  to 
return  such  a  long  distance  in  ballast  without  the  prospect  of 
remunerative  employment.     This  situation  left  a  large  number 


364  TRUSTS,    POOLS   AND    CORPORATIONS 

of  cargo  vessels  stranded  in  eastern  ports,  unable  to  get  back  to 
western  waters.  A  large  part  of  the  world's  carrying  trade  was 
thus  locked  up.  The  available  supply  of  shipping  was  suddenly 
diminished.  The  tonnage  afloat  accessible  to  English  shippers 
was  no  longer  as  in  1895,  "enormously  in  excess  of  the  world's 
requirements." 

Upon  a  straitened  supply  was  now  precipitated  an  avalanche 
of  orders.     Says  the  Econouiist : 

The  corn  trade  in  the  past  year  assumed  a  novel  and  unexpected  posi- 
tion ;  the  production  of  the  world  was  slightly  short  of  the  consumptive 
requirements,  .  .  .  two  of  the  large  producing  and  exporting  countries 
(India  and  Australia)  being  actually  converted  into  considerable  importers, 
and  several  hitherto  small  importers  making  largely  increased  demands. 

The  general  trade  of  the  country,  as  the  Economist  notes,  main- 
tained the  improvement  and  expansion  awakened  and  started 
more  than  twelve  months  earlier. 

These  combined  influences  came  to  bear  on  the  freight  market  almost 
simultaneously;  shippers  of  nearly  every  description,  all  wanting  the 
same  thing  at  the  same  moment,  with  a  rather  short  supply  of  the  article  ; 
result,  blind  competition  sending  up  the  price  of  tonnage  by  leaps  and 
bounds,  in  many  cases  200  to  300  per  cent,  from  the  end  of  September 
to  the  end  of  November.  ...  By  so  much  as  the  rise  was  rapid,  by  so 
much  was  the  decline  equally  rapid,  and  at  the  close  of  the  year  we  find 
freights  all  around,  in  every  trade,  worse  if  anything  than  at  the  com- 
mencement.^ 

This  experience  has  been  repeatedly  duplicated  in  every  market. 
It  is  true  that  the  total  supply  of  ocean  shipping  will  in  time 
become  available  to  relieve  any  congestion  ;  but  much  time  must 
often  elapse  before  reHef  can  be  extended,  the  tonnage  must  be 
moved  at  once,  and  the  ship-owners  who  are  fortunate  in  being 
on  the  spot  reap  a  rich  harvest.  On  the  other  hand,  vessels 
which  have  gone  out  in  ballast  to  Argentine  or  the  United  States, 
expecting  full  cargoes  of  grain,  or  which  have  made  the  long 
voyage  to  Austraha,  expecting  a  large  movement  of  wool,  suffer 
the  full  effects  of  a  crop  failure  or  a  small  wool  clip. 

The  following  table  shows  the  fluctuations  over  a  ten-year 
period  in  four  of  the  leading  items  in  the  world's  export  trade. 

1  Commercial  History  and  Review  of  1896.     Economist,  Vol.  LV,  supplement,  p.  25. 


THE    MERCANTILE    MARINE    COMPANY 


3^>5 


OS 

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Export 

OF  WlIKAT 
l-KOM  U.  S. 

..  s  ^ 

0  0  u 

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w   u   g 
U  g  § 

Export 
OF  Cotton 
FROM  U.  S. 

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ExrouT 
OF  Corn 
FROM  U.  S.      J   .     , 

Export  of 

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ots  Year 

Busliels 

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Bales 

111    ~    u 

Bushels 

K     <     > 

w  s  u 

Thousand  cwt. 

2  <  > 

U    X    111 

^5& 

1892 

225,665,812 

5,858,000 

76,602,285 

26,297 

i«93 

191,912,635 

-  15 

4,390,000 

-27 

47,121,894 

-39 

50.351 

+  91 

1894 

164,283,129 

-  14 

5,232,000 

+ 19 

66,489,529 

+  48 

65,966 

+  31 

i«95 

144,812,718 

—  12 

6,726,000 

+  29 

28,585,405 

-57 

76,453 

+ 16 

1896 

126,443,968 

—  12 

4,627,000 

-31 

101,100,375 

+243 

70,774 

-    6 

1897 

145,124,972 

+  15 

5,979,000 

+  29 

178,817,417 

+  77 

68,670 

—     2 

1898 

217,306,004 

+  49 

7,540,000 

+  26 

212,055,543 

+  19 

57,047 

-15 

1899 

222,618,420 

+    2 

7,313,000 

~    3 

177.255.046 

-  17 

34,466 

-40 

1900 

186,096,762 

-  17 

5,946,000 

- 19 

213,123,412 

+  20 

37,627 

+    9 

1901 

215,990,073 

+  15 

6,538,000 

+    9 

181,403,473 

—  20 

44,626 

+  19 

Many  of  these  fluctuations  took  the  shipping  trade  by  surprise, 
and  either  too  few  or  too  many  boats  were  available.  In  other 
cases,  the  supply  of  shipping  the  world  over  was  either  excessive 
or  redundant,  and  freights  fell  or  rose  to  correspond. 

So  much  for  the  temporary  fluctuations  of  ocean  freight  rates 
and  tonnage.  There  are  also  movements  of  longer  duration,  cor- 
responding to  the  ebb  and  flow  of  general  business,  but  subject 
in  peculiar  measure  to  the  influence  of  special  forces.  From 
1893  to  1897,  for  example,  the  leading  commercial  countries  were 
suffering  from  a  commercial  depression  which  caused  a  general 
decrease  in  the  tonnage  of  international  trade,  and  a  still  greater 
fall  in  the  value  of  exports  and  imports.  The  effect  of  this  situ- 
ation upon  the  shipping  industry  has  been  already  indicated. 
Tonnage  could  not  be  decreased,  and,  in  fact,  the  tonnage  of  the 
world  during  these  three  years  increased.  The  result  was  an 
unprecedented  depression  in  the  shipping  industry.  In  1893, 
the  Ecoiwviisf  s  review  reports  a  large  number  of  steamers  laid 
up  and  a  number  disposed  of  at  forced  sale.  In  1894,  the  report 
was  "low,  unprofitable  freights  and  declining  values  of  property 
engaged  ;  the  whole  of  the  enormous  trade  has  brought  little  or 
no  profit,  and  a  very  bare  margin  over  working  expenses,  far 
from  enough  to  cover  depreciation."  In  1895,  came  a  year 
"which  will  not  readily  be  forgotten  by  the  ship-owners.  .  .  . 


366  TRUSTS,    POOLS   AND    CORPORATIONS 

Our  anticipations  have  been  to  the  full  realized,  and  probably  a 
worse  year  than  the  present  has  not  been  experienced  by  the 
very  oldest  in  the  business."^  The  condition  of  the  trade,  in 
1896,  as  already  remarked,  was  little  better. 

During  the  four  succeeding  years,  the  situation  was  entirely 
changed.  The  widespread  industrial  revival  caused  a  large  in- 
crease in  the  value  of  foreign  trade ;  and  the  shipping  trade,  as 
illustrated  by  the  rapid  and  extraordinary  rise  in  the  profits  of 
the  Cunard  Company,  became  very  profitable.^  The  main  sup- 
port of  the  market,  during  1897  and  1898,  was  the  American 
export  trade,  which  was  characterized  in  the  Economist s  annual 
review  of  1897  as  follows: 

It  contributed  largely  toward  sustaining  rates  in  the  early  months,  and 
causing  a  material  advance  during  the  autumn  and  late  summer  in  all 
other  rates  by  the  ready  absorption  and  continued  demand  for  tonnage 
of  all  descriptions  from  the  leviathan  8000  to  20,000  ton  cargo  boats, 
to  small  fruit  steamers.'^ 

In  1899  the  advance  continued.  General  trade,  the  world 
over,  was  active,  and  the  South  African  war  resulted  in  the 
largest  withdrawal  of  shipping  that  had  been  known  for  more 
than  a  generation.  An  outbreak  of  hostilities,  involving  even 
a  second-rate  power,  always  demands  the  services  of  a  large 
amount  of  shipping.  Even  the  effect  of  the  Greco-Turkish  war 
was  sensibly  felt ;  the  influence  of  the  China-Japanese  war  has 
been  already  mentioned ;  and  the  Spanish-American  war  mate- 
rially contributed  to  the  prosperity  of  the  trade  in  1898.  The 
shipping  industry  can,  over  a  period  of  years,  depend  with  reason- 
able certainty  upon  the  assistance  of  several  wars.  If  inter- 
national disturbances  occur  during  a  period  of  depression,  the 
freight  and  traffic  situation  is  relieved,  and  if,  as  in  the  case  of  the 
Boer  war,  the  outbreak  of  hostilities  comes  hard  upon  the  heels 
of  general  and  abounding   prosperity,  the  result  is  enormous 

1  Economist,  Vol.  LIV,  supplement,  p.  26. 

2  The  combined  exports  and  imports  of  the  United  States,  Germany,  and  Great 
Britain,  in  1895  were  valued  at  $6,323,207,441.  In  1901,  six  years  later,  their  value 
had  risen  to  $8,635,362,581.  A  large  portion  of  this  increase  was  undoubtedly  due 
to  the  rise  of  prices,  but  the  gain  in  tonnage  was  chiefly  responsible. 

2  Economist,  Vol.  LVI,  supplement,  p.  24. 


THE    MERCANTILE    MARINE    COMPANY  367 

profits  for  all  ship-owners.  Not  only  does  war  increase  the  de- 
mand for  ships,  usually  on  terms  hit^hly  favorable  to  the  owners, 
but  it  raises  the  level  of  freight  the  world  over  by  reducing  the 
supply  of  tonnage. 

These  results  followed  from  the  South  African  conflict.  At 
the  close  of  1900,  the  British  government  had  withdrawn  some 
2,000,000  tons  of  shipping,  an  amount  nearly  equal  to  the  total 
steam  tonnage  of  Germany,  and  nearly  double  that  of  France. 
In  1900,  moreover,  the  troubles  in  China  required  the  transpor- 
tation of  large  numbers  of  troops  to  the  East,  and  throughout 
the  Boer  war,  a  large  coal  tonnage  was  kept  moving  to  the 
Cape.  The  result,  as  stated  in  the  Economisf  s  annual  review, 
was  that 

The  tonnage  taken  on  time  charter  for  all  trades  during  the  past  year 
has  been  unprecedented.  The  rates  paid  by  our  Government  for  trans- 
ports were  20s.  per  gross  register  per  month,  and  in  some  cases  more. 
Many  charters  in  ordinary  trades  were  made  for  long  periods  at  very 
remunerative  rates.  Modern  boats  have  commanded  from  7^.  to  1 1^. 
(id.  per  gross  ton,  according  to  the  trade  and  length  of  charter.^ 

In  1 90 1,  however,  the  tide  turned.  During  the  preceding  four 
years,  the  supply  of  tonnage  had  been  increased  4,049,260  tons, 
and  with  the  close  of  the  war,  the  British  government  rapidly 
released  the  ships  which  it  had  employed.  To  make  matters 
worse,  the  American  corn  crop  was  a  failure,  and  the  industrial 
depression  on  the  continent  reduced  the  amount  of  freight  move- 
ment. Rates  fell  30  per  cent  throughout  the  year,  and  have 
continued  to  fall  during  1902  and  1903,  the  close  of  1903  find- 
ing the  trade  extremely  depressed,  with  little  prospect  of  early 
improvement. 

We  find  in  this  hasty  review  of  the  recent  history  of  the  ship- 
ping trade  an  explanation  of  the  irregularity  of  the  profits  of  the 
Cunard  Company,  and  can  understand  why  the  directors  have 
pursued  such  a  niggardly  policy  in  the  disbursement  of  profits. 
The  management  of  a  shipping  company  lives  in  constant  appre- 
hension. Exposed  to  increasing  competition  on  every  hand ; 
compelled  every  year  to  build  new  and  larger  boats  to  keep  pace 

1  Economist,  Vol.  LX,  supj)lcment,  p.  28. 


368  TRUSTS,    POOLS   AND  CORPORATIONS 

with  their  rivals  ;  anxiously  scanning  the  commercial  horizon  for 
signs  of  business  depression,  crop  failures,  famines,  or  labor  dis- 
turbances ;  hoping  and  scheming  for  a  few  crumbs  of  subsidy, 
to  introduce  a  modicum  of  fixed  income  into  their  earnings; 
engaged  in  a  business  as  shifting  and  unstable  as  the  sea  on 
which  that  business  is  conducted  —  is  it  any  wonder  that  the 
experienced  ship-owners  hold  fast  to  their  profits  and  regard  the 
results  of  a  year  like  1900  as  a  gift  of  Providence  to  be  guarded 
with  zealous  care  ? 

Into  this  peculiar  business  came  the  promoters  of  the  Inter- 
national Mercantile  Marine  Company.  Attempting  to  apply  to 
the  shipping  industry,  the  same  principles  of  consolidation  and 
capitalization  which  had  been  superficially  successful  on  land, 
they  imposed  upon  the  new  corporation  an  unusually  heavy 
burden  of  capitalization,  and  they  so  arranged  the  capitalization 
as  to  make  conservative  financial  management  of  the  new  com- 
pany very  difficult.  The  purchase  price  of  most  of  the  sub- 
sidiary companies  was  based  on  the  profits  of  1900.  In  the 
vendors'  agreement  between  the  syndicate  and  the  White  Star 
line,  for  example,  it  was  stated  that 

the  valuation  of  the  said  shares  hereunder  and  under  said  principal  con- 
tract shall,  subject  as  hereafter  provided,  be  a  sum  equal  to  ten  times 
the  net  profits  of  the  company  of  the  year  1900,  subject  to  the  following 
exceptions  .  .  .  (a)  a  sura  for  depreciation  equal  to  6  per  cent  on  the 
amounts  at  which  the  property  of  the  company  stood  on  its  books  on 
the  first  day  of  January,  1900,  and  a  sum  for  insurance  .  .  .  equal  to 
_;^3  los.  on  the  same  amount  .  .  .^ 

It  was  further  stipulated  that  the  earnings  of  steamships  em- 
ployed by  the  British  government  should  "be  credited  .  .  .  with 
net  earnings  of  the  same  amount  as  were  earned  or  would  be 
earned  by  similar  steamships  of  the  company  for  the  same  periods 
in  their  ordinary  trades." 

The  year  1900,  as  has  been  shown,  was  one  of  abnormal  prof- 
its. The  Cunard  Company  nearly  doubled  its  net  earnings,  and 
it  is  reasonable  to  suppose  that  other  companies  were  equally 

1  For  the  text  of  these  vendors'  agreements,  see  Report  of  the  U.  S.  Commissioner 
of  Navigation,  1902,  Appendix  T,  pp.  380  ei  seq. 


THE   MERCANTILE    MARINE   COMPANY  369 

fortunate,  A  partial  record  of  the  prosperity  of  this  j^^ar  is  fur- 
nished by  the  record  of  dividends.  The  average  dividend  of 
twenty-five  leading  companies  in  1896  was  6  per  cent;  in  1898, 
y.y  per  cent ;  and  in  1900,  9.4  per  cent.  In  the  extract  from  the 
vendors'  agreement  quoted  above,  we  find  a  recognition  of  the 
fact  that  the  profits  of  1900  were  exceptional,  viz.,  the  provision 
reducing  the  earnings  of  ships  employed  in  the  government 
service  to  the  general  average  of  private  employment.  This 
reservation,  however,  does  not  go  far  enough.  The  mere  fact 
of  a  large  government  employment,  as  has  been  shown,  was 
sufficient  to  heavily  increase  the  earnings  of  ships  in  private 
employment,  and  in  capitalizing  the  earnings  of  this  single  year, 
the  promoters  of  the  Shipping  trust  made  a  serious  mistake. 

Indeed,  so  apparent  was  the  mistake,  and  so  clearly  did  the 
trade  foresee  that  reaction  was  impending,  that  this  fact  was 
openly  urged  upon  the  shareholders  by  the  Leyland  line  as  an 
inducement  to  fall  in  with  Mr.  Morgan's  plans.  Said  Mr.  Eller- 
man,  in  May,  1901,  at  the  shareholders'  meeting  of  Frederick 
Leyland  and  Company : 

The  outlook  for  freights  in  the  near  future  is,  in  my  judgment,  an 
uncertain  one.  We  have  had  prosperous  times,  and  I  feel  that  the 
near  future  may  bring,  at  all  events  for  a  time,  a  reflux  of  bad  times, 
particularly  when  the  tonnage  which  is  usually  employed  in  the  North 
Atlantic  trade,  but  which  is  now  employed  in  government  transport 
work,  returns  to  normal  employment ;  in  addition  to  which  a  large 
amount  of  tonnage  is  building  in  America  for  employment  in  the 
Atlantic  trade  .  .  .^ 

Not  only  was  the  amount  of  capitalization  excessive,  but  what 
was  more  important,  the  arrangement  of  the  capital  of  the  Ship- 
ping trust,  taken  in  connection  with  the  amount  of  the  different 
issues,  was  open  to  serious  criticism.  In  addition  to  an  amount 
of  bonds  fully  sufficient  to  absorb  the  maximum  earnings  of  the 
company,  a  liability  of  $54,600,000  of  cumulative  preferred  stock 
was  assumed,  all  of  whose  passed  dividends  must  be  paid  before 
the  common  stock  receives  anything.  Our  previous  discussion 
has  shown  the  shipping  business  to  be  so  irregular  that  even  with 

^  Report  of  Commissioner  of  Navigation,  1901,  p.  321. 


370  TRUSTS,    POOLS   AND    CORPORATIONS 

the  most  moderate  capitalization,  in  some  years  dividends  must 
be  passed,  and  in  other  years  paid  out  of  reserve.  At  all  times, 
the  directors  should  have  a  free  hand  in  determining  whether 
profits  shall  be  distributed  to  stockholders,  used  for  replacements 
and  depreciation,  invested  in  securities,  or  held  in  cash.  The 
irregularity  of  the  business  is  so  great,  that  a  free  disposition  of 
profits  to  stockholders  is  out  of  the  question.  The  policy  of  a 
well-managed  shipping  company  is  dominated  by  the  necessity 
of  reserving  from  two-thirds  to  three-fourths  of  the  profits  in 
order  that  one-fourth  may  be  paid  out  in  dividends.  In  view  of 
this  fact,  the  absolute  amount  of  the  Shipping  trust's  capitaliza- 
tion is  of  much  less  consequence  than  the  nature  of  the  liabilities 
which  it  includes.  The  fact  that  the  company  is  excessively 
capitalized  is  of  less  consequence  than  the  fact  that  the  arrange- 
ment of  this  capitalization  is  such  as  to  make  prudent  financial 
administration  very  unpopular  with  stockholders.  In  this  arrange- 
ment, fixed  charges  and  obligatory  payments  predominate.  Of 
the  $170,600,000  of  capital,  $122,600,000  consist  of  bonds  and 
cumulative  preferred  stock.  If  the  debenture  interest  is  passed, 
while  the  form  of  the  bonds  puts  foreclosure  proceedings  out  of 
the  question,  the  unpaid  interest  must  be  discharged  before  any- 
thing is  paid  on  the  preferred  stock ;  and  if  the  preferred  stock- 
holder is  forced  to  await  the  convenience  of  the  corporation,  the 
hope  of  the  common  stockholder  of  receiving  anything  on  his 
investment  becomes  remote.  In  other  words,  a  conservative 
administration  of  the  finances  of  the  shipping  consolidation 
involves  a  series  of  postponements,  an  accumulation  of  deferred 
claims.  The  collection  of  a  reserve  sufficient  to  pay  dividends 
in  years  of  depression,  if  we  may  judge  from  the  experience  of 
other  companies  capitalized  on  a  basis  similar  to  that  of  Inter- 
national Mercantile  Marine,  is  likely  to  be  seriously  interfered 
with  by  the  importunities  of  deferred  claimants. 

It  would  be  going  too  far  to  say  that  the  International  Mercan- 
tile Marine  Company  is  a  failure.  Its  future  lies  in  the  hands  of 
the  stockholders.  If  they  will  sanction  a  policy  of  conservatism 
in  the  distribution  of  earnings  there  is  no  reason  to  suppose  that 
the  preferred  stock  of  the  company  may  not  eventually  be  raised 
to  the  rank  of  an  investment.     The  unfortunate  experience  of 


THE   MERCANTILE    MARINE   COMPANY  371 

the  corporation  up  to  the  present  time,  however,  emphasizes  the 
fact  that  it  is  necessary,  in  arranging  the  capitaHzati6"n'of  a  new- 
company,  to  take  into  careful  account  the  conditions  of  the  busi- 
ness in  which  the  new  concern  is  to  operate,  and  in  every  case  to 
assume  that  industrial  history  is  to  be  repeated.  The  "  economies 
of  combination  "  are  no  doubt  considerable,  but  they  are  too  prob- 
lematical to  be  safely  included  in  an  estimate  of  earnings  available 
for  distribution  to  stockholders. 

Edward  Sherwood  Meade 


XI 

THE  UNITED  STATES  LEATHER  COMPANY i 

CHRONOLOGICAL   SUNBL\RY 

1892.  Agreement  not  to  wet  hides  for  six  months. 

1893.  Organization  of  the  United  States  Leather  Company. 
1899.    Plan  for  paying  accumulated  dividends  hrst  suggested. 

First  plan  of  reorganization  unsuccessful. 

1902.  Revaluation  of  company's  timber  lands. 

1903.  Second  plan  of  reorganization  unsuccessful. 

1904.  Final  plan  of  reorganization  proposed. 

1905.  Announcement  of  successful  operation  of  plan. 
Incorporation  of  Central  Leather  Company. 

1906.  Attempted  merger  of  the  two  companies. 

1907.  Beginning  of  the  Colgate  htigation. 

1909.    Decision  of  the  New  Jersey  court  against  the  merger. 
Final  settlement  of  litigation  out  of  court. 

THE  reorganization  of  the  United  States  Leather  Company 
into  the  Central  Leather  Company  affords  one  of  the  sim- 
plest and  most  instructive  examples  of  modern  reorganization 
finance.  The  financial  difficulties  of  the  company  grew  out  of 
the  highly  competitive  character  of  the  leather  industry  combined 
with  the  need  of  an  abundance  of  working  capital  which  the 
tanning  of  hides  on  a  large  scale  requires.  To  these  economic 
conditions  was  added  the  fact  that  the  preferred  stock,  carrying 
heavy  preferential  dividends,  was  issued  largely  to  acquire  un- 
productive timber  lands.  The  reorganization  itself  involved  the 
question  of  the  rights  of  preferred  shareholders  to  accumulated 
but  unpaid  dividends  and  to  a  bookkeeping  surplus  arising  out 
of  the  supposed  increase  in  value  of  tangible  assets. 

The  sole  leather  industry  does  not  lend  itself  readily  to  large- 
scale  production.  Little  capital  for  plant  is  required,  in  pro- 
portion to  the  output;  the  raw  materials  (hide  and  bark)  are 
purchased  in  a  highly  competitive  market,  and  the  finished  prod- 
uct is  sold  under  equally  keen  conditions  of  competition.     The 

1  From  A.  S.  Dewing,  Corporate  Promotions  and  Reorganizations,  Harvard 
Economic  Studies,  1914.  This  chapter  is  only  one  indication  of  the  wealth  of 
material  gathered  therein.     Copious  footnotes  are  omitted. 

372 


THE   UNITED   STATES    LEATHER   COMPANY         373 

American  tanners  buy  their  raw  Argentina  hides  in  competition 
with  Canadian  and  European  tanners,  and  they  sell  their  leather 
in  competition  with  the  leather  of  these  same  tanners.  The 
markets  in  which  they  buy  and  sell  are,  therefore,  world-wide 
in  scope.  No  large  amount  of  skilled  labor  of  a  technical  order 
^  required,  for  the  tanning  of  hides  is  a  long-time  process  in 
which  the  cost  of  labor  is  subordinate  to  the  cost  of  the  raw 
material.  The  small  tanner  who  is  near  his  bark  lands  can, 
indeed,  tan  a  few  hides  a  week  quite  as  cheaply  as  the  large 
tanner,  further  removed,  can  tan  a  hundred  or  a  thousand  times 
as  many.  Under  these  conditions  it  would  seem  that  American 
tanners  could  derive  little  advantage  from  consolidation.  Yet, 
in  spite  of  these  underlying  facts,  the  sole  leather  industry  was 
one  of  the  first  to  resort  to  centralized  organization  in  the  hope 
of  allaying  the  disastrous  results  of  competition  and  enhancing 
the  profits  through  large-scale  production.  At  the  time  this 
consolidation  was  formed,  moreover,  it  was  represented  by  the 
only  corporation  in  the  country  with  a  capitalization  well  over 
a  hundred  million  dollars.  Viewing  the  matter  broadly,  then, 
we  seem  to  have  here  a  huge  capitalistic  combination  seeking  to 
apply  the  methods  of  large-scale  production  without  the  prop 
of  a  natural  or  legal  monopoly  and  in  the  face  of  those  economic 
conditions  which  favor  small-scale  production. 

A  considerable  part  of  the  heavy  sole  leather  of  the  country 
is  tanned  in  Pennsylvania  and  southern  New  York  State.  Near 
are  the  large  hemlock  and  oak  forests  which  yield  the  bark  upon 
which  the  tanning  industry  depends.  For  a  considerable  period 
of  time,  until  perhaps  1880,  the  tanners  experienced  no  difficulty 
in  obtaining  all  the  bark  they  needed  at  nominal  prices.  Gradu- 
ally, however,  as  the  more  available  sections  of  forest  land  were 
cut,  and  the  bark  became  dearer,  the  tanners  themselves  began 
to  acquire  extensive  areas  of  timberland  in  order  to  safeguard 
their  supplies.  Each  tanner  bought  the  land  as  it  was  offered 
without  much  regard  to  the  question  of  whether  it  vvas  nearer 
his  own  tannery  or  that  of  a  competitor.  As  a  result  the  various 
timber  holdings  became  so  intermingled  that  economical  ex- 
ploitation of  the  bark  lands  was  impossible.  The  price  of  sole 
leather  fell  steadily  from  1884  to  1891,  and  competition  among 


XI 
THE  UNITED  STATES  LEATHER  COMPANY  i 

CHRONOLOGICAL   SUMMARY 

1892.  Agreement  not  to  wet  hides  for  six  months. 

1893.  Organization  of  the  United  States  Leather  Company. 
1899.    Plan  for  paying  accumulated  dividends  first  suggested. 

First  plan  of  reorganization  unsuccessful. 

1902.  Revaluation  of  company's  timber  lands. 

1903.  Second  plan  of  reorganization  unsuccessful. 

1904.  Pinal  plan  of  reorganization  proposed. 

1905.  Announcement  of  successful  operation  of  plan. 
Incorporation  of  Central  Leather  Company. 

1906.  Attempted  merger  of  the  two  companies. 

1907.  Beginning  of  the  Colgate  litigation. 

1909.    Decision  of  the  New  Jersey  court  against  the  merger. 
Final  settlement  of  litigation  out  of  court. 

THE  reorganization  of  the  United  States  Leather  Company 
into  the  Central  Leather  Company  affords  one  of  the  sim- 
plest and  most  instructive  examples  of  modern  reorganization 
finance.  The  financial  difficulties  of  the  company  grew  out  of 
the  highly  competitive  character  of  the  leather  industry  combined 
with  the  need  of  an  abundance  of  working  capital  which  the 
tanning  of  hides  on  a  large  scale  requires.  To  these  economic 
conditions  was  added  the  fact  that  the  preferred  stock,  carrying 
heavy  preferential  dividends,  was  issued  largely  to  acquire  un- 
productive timber  lands.  The  reorganization  itself  involved  the 
question  of  the  rights  of  preferred  shareholders  to  accumulated 
but  unpaid  dividends  and  to  a  bookkeeping  surplus  arising  out 
of  the  supposed  increase  in  value  of  tangible  assets. 

The  sole  leather  industry  does  not  lend  itself  readily  to  large- 
scale  production.  Little  capital  for  plant  is  required,  in  pro- 
portion to  the  output ;  the  raw  materials  (hide  and  bark)  are 
purchased  in  a  highly  competitive  market,  and  the  finished  prod- 
uct is  sold  under  equally  keen  conditions  of  competition.     The 

1  From  A.  S.  Dewing,  Corporate  Promotions  and  Reorganizations,  Harvard 
Economic  Studies,  1914.  This  chapter  is  only  one  indication  of  the  wealth  of 
material  gathered  therein.     Copious  footnotes  are  omitted. 

372 


THE   UNITED   STATES    LEATHER   COMPANY         373 

American  tanners  buy  their  raw  Argentina  hides  irucompctition 
with  Canadian  and  European  tanners,  and  they  sell  their  leather 
in  competition  with  the  leather  of  these  same  tanners.  The 
markets  in  which  they  buy  and  sell  are,  therefore,  world-wide 
in  scope.  No  large  amount  of  skilled  labor  of  a  technical  order 
^  required,  for  the  tanning  of  hides  is  a  long-time  process  in 
which  the  cost  of  labor  is  subordinate  to  the  cost  of  the  raw 
material.  The  small  tanner  who  is  near  his  bark  lands  can, 
indeed,  tan  a  few  hides  a  week  quite  as  cheaply  as  the  large 
tanner,  further  removed,  can  tan  a  hundred  or  a  thousand  times 
as  many.  Under  these  conditions  it  would  seem  that  American 
tanners  could  derive  little  advantage  from  consolidation.  Yet, 
in  spite  of  these  underlying  facts,  the  sole  leather  industry  was 
one  of  the  first  to  resort  to  centralized  organization  in  the  hope 
of  allaying  the  disastrous  results  of  competition  and  enhancing 
the  profits  through  large-scale  production.  At  the  time  this 
consolidation  was  formed,  moreover,  it  was  represented  by  the 
only  corporation  in  the  country  with  a  capitalization  well  over 
a  hundred  million  dollars.  Viewing  the  matter  broadly,  then, 
we  seem  to  have  here  a  huge  capitalistic  combination  seeking  to 
apply  the  methods  of  large-scale  production  without  the  prop 
of  a  natural  or  legal  monopoly  and  in  the  face  of  those  economic 
conditions  which  favor  small-scale  production. 

A  considerable  part  of  the  heavy  sole  leather  of  the  country 
is  tanned  in  Pennsylvania  and  southern  New  York  State.  Near 
are  the  large  hemlock  and  oak  forests  which  yield  the  bark  upon 
which  the  tanning  industry  depends.  For  a  considerable  period 
of  time,  until  perhaps  1880,  the  tanners  experienced  no  difficulty 
in  obtaining  all  the  bark  they  needed  at  nominal  prices.  Gradu- 
ally, however,  as  the  more  available  sections  of  forest  land  were 
cut,  and  the  bark  became  dearer,  the  tanners  themselves  began 
to  acquire  extensive  areas  of  timberland  in  order  to  safeguard 
their  suppHes.  Each  tanner  bought  the  land  as  it  was  offered 
without  much  regard  to  the  question  of  whether  it  was  nearer 
his  own  tannery  or  that  of  a  competitor.  As  a  result  the  various 
timber  holdings  became  so  intermingled  that  economical  ex- 
ploitation of  the  bark  lands  was  impossible.  The  price  of  sole 
leather  fell  steadily  from  1884  to  1891,  and  competition  among 


374  TRUSTS,    POOLS   AND    CORPORATIONS 

the  tanners  grew  increasingly  severe.  In  1892  there  were  signs 
of  marked  over-production.  As  a  result  the  large  tanners 
entered  into  an  agreement  not  to  wet  any  more  hides  for  a  period 
of  sixty  days.  The  plan  worked  excellently  and  the  tanners  were 
able  to  dispose  of  their  surplus  stocks  without  suffering  a  loss. 

The  favorable  outcome  of  the  agreement  of  1892  and  the 
widely  recognized  success  of  the  oil,  whisky,  and  sugar  com- 
binations led  five  of  the  largest  tanning  interests  to  consider  the 
possibility  of  making  a  more  economical  use  of  their  bark  lands 
by  merging  their  different  interests  in  one  company.  The  bark 
for  each  tannery  could  then  be  obtained  from  the  nearest  source, 
—  obviously  an  economy  of  operation,  —  and  with  the  control 
of  a  large  proportion  of  the  available  bark,  with  economical 
methods  of  manufacture  and  decreased  selling  expenses,  the 
tanners  beheved  they  would  be  able  to  produce  leather  more 
cheaply  than  their  competitors.  Then,  too,  some  of  the  older 
men  were  desirous  of  organizing  their  business  affairs  so  that 
their  estates  could  be  administered  easily  in  case  of  their  death. 
These  were  the  chief  reasons  which  led  to  the  formation  of  the 
United  States  Leather  Company  in  the  spring  of  1893. 

The  leaders  of  the  movement  appointed  committees  to  ap- 
praise the  tanneries  and  bark  lands  owned  by  the  interests  that 
had  consented  to  enter  the  consolidation.  The  property  was 
then  acquired  by  the  consolidated  company  on  the  basis  of  the 
appraisals  by  issuing  $100  in  preferred  stock  and  $100  in  com- 
mon stock  in  return  for  each  ^100  in  the  appraised  value  of  the 
property.  In  other  words,  the  company  paid  for  the  tanneries 
and  bark  lands  by  issuing  its  preferred  stock  and  by  giving  an 
equal  amount  of  common  stock  as  a  bonus.  In  this  way  the 
leaders  of  the  movement  acquired  approximately  no  tanneries, 
controlled  by  some  60  leather  houses.  Besides  the  tanning 
properties  the  combination  acquired  about  400,000  acres  of  bark 
land  and  the  bark  rights  on  nearly  100,000  more.  At  the  outset, 
the  combination  controlled  approximately  72  per  cent  of  the 
country's  output  of  hemlock  tanned  leather,  about  30  per  cent  of 
the  oak  tanned  and  about  45  per  cent  of  the  union  tanned  leather. 
From  various  lines  of  evidence  it  appears  that  the  strongest  firms 
in  the  hemlock  branch  of  the  industry  went  into  the  combination. 


THE   UNITED   STATES    LEATHER   COMPANY  375 

but  the  more  prosperous  oak  and  union  tanners  refused  to  enter, 
largely  because  they  were  not  offered  sufficiently  liberal  terms. 
It  is  fair  to  say  that  the  United  States  Leather  Company  con- 
trolled, at  its  inception,  about  58  per  cent  of  the  sole  leather 
tanned  in  the  country.  No  promoter  was  instrumental  in  form- 
ing the  consolidation.  Even  bankers  were  not  resorted  to  except 
for  the  sale  of  a  small  issue  of  debenture  bonds.  The  formation 
of  the  company  may  be  looked  upon,  therefore,  as  typical  of  those 
cases  in  which  manufacturers  themselves  united  their  businesses 
in  the  hopes  of  obtaining  the  economies  of  combination,  and 
large-scale  production. 

The  United  States  Leather  Company  was  incorporated  in 
New  Jersey,  February  25,  1893,  under  the  old  "  Act  Concerning 
Corporations"  approved  April  7,  1875.  The  certificate  of  incor- 
poration was  afterward  amended  several  times.  The  important 
items  of  its  early  financing  can  be  expressed  in  a  nutshell  as 
follows.  The  authorized  capital  consisted  of  $64,000,000  pre- 
ferred and  the  same  amount  of  common  stock.  Of  these  amounts 
there  were  issued,  after  various  adjustments  had  been  made, 
$62,282,300  of  the  preferred  and  $62,882,300  of  the  common. 
The  preferred  stock  carried  8  per  cent  cumulative  preferen- 
tial dividends,  to  be  paid  from  the  net  earnings  of  the  business. 
This  was  preferred  both  as  to  dividends  and  to  assets  in  case 
of  liquidation.  Working  capital  was  furnished  by  an  issue 
of  $10,000,000,  debenture  bonds  of  which  $6,000,000  were  under- 
written and  issued  at  par  through  a  syndicate  managed  by  Heidel- 
bach,  Ickelheimer  and  Company  ;  4  per  cent  of  these  bonds  were 
to  be  retired  each  year  at  not  over  1 10  per  cent.  The  preferred 
stock  was  issued  as  has  been  said  in  return  for  the  property  of 
the  various  subsidiary  tanners.  With  each  share  of  the  pre- 
ferred stock  was  given  a  single  share  of  the  common  and  $600,000 
par  value  of  the  common  stock  was  also  given  to  the  syndicate 
underwriters  as  a  10  per  cent  commission  for  underwriting  the 
debenture  bonds.  Using  the  figures  derived  from  the  appraisals, 
it  would  appear  that  the  United  States  Leather  Company  was 
possessed,  at  its  inception,  of  property  to  the  value  of  $63,- 
000,000.  Distinctly  different  opinions  exist  as  to  whether  the 
appraisals  were  fair.     The  tanners  who  sold  their  property  to 


376  TRUSTS,    POOLS   AND   CORPORATIONS 

the  company  considered  them  just,  whereas  tanners  not  within 
the  combination  considered  them  clear  inflations  of  the  actual 
value  of  the  property.  The  greater  part  of  the  property  con- 
sisted of  bark  lands.  These  were  acquired  on  a  basis  of  $2.50  a 
cord  for  lands  bought  outright  and  $.50  a  cord  for  lands  with 
bark  rights  alone.  These  bases  appear  from  other  lines  of 
evidence  to  be  just.  There  may  have  been  an  overvaluation 
of  the  tannery  property.  All  things  considered,  however,  it 
seems  fair  to  believe  that  the  property  acquired  by  the  United 
States  Leather  Company  had  an  actual  market  value  of  $60,- 
000,000,  including  the  $6,000,000  in  money  obtained  from  the 
bankers.  Against  these  assets  the  company  issued  $131,000,- 
000  of  securities,  for  nearly  half  of  which  the  tanners  admitted 
there  was  nothing  tangible.  The  charges,  including  the  cumu- 
lative dividends,  required  $5,342,584. 

The  financial  position  of  the  United  States  Leather  Company 
with  respect  to  other  capitalistic  combinations  of  the  time  de- 
serves some  comment.  At  its  formation  in  1893  it  had  the 
largest  book  capitahzation  of  any  American  industrial  corpora- 
tion. The  component  companies  of  the  recently  dissolved 
Standard  Oil  Trust  had  at  that  time  a  little  over  $102,000,000; 
the  American  Sugar  Refining  Company  had  an  authorized  capi- 
tal of  $75,000,000;  the  National  Lead  Company  a  little  less 
than  $30,000,000;  the  American  Tobacco  Company  $35,000,- 
000 ;  and  the  United  States  Rubber  Company  $50,000,000. 
All  the  other  industrial  combinations  then  in  existence  had  yet 
smaller  capitalizations. 

The  capitalization  figures  of  the  United  States  Leather  Com- 
pany express  the  unbounded  optimism  with  which  the  leaders 
of  the  enterprise  entered  into  the  work  of  managing  the  new 
combination.  The  old  leather  interests,  represented  by  men 
who  had  conducted  their  separate  businesses  for  thirty  years  and 
more  under  conditions  of  free  competition,  believed  that  the 
low  price  of  the  finished  product  was  directly  attributable  to  the 
severity  of  competition.  They  confidently  expected  that  when 
the  economies  of  combination  had  been  introduced,  a  period  of 
high  prices  and  trade  prosperity  would  necessarily  follow.  Ac- 
cording to  a  prospectus  issued  at  the  time  the  company  was 


THE   UNITED   STATES   LEATHER   COMPANY  377 


formed,  the  constituent  tanners  had  been  making  nct^profits  of 
over  ^4,800,000.  This  statement  was  made  in  face  of  the  fact 
that  the  business  had  been  demoraHzed  for  two  and  a  half  years 
preceding.  In  addition  the  tanners  believed  they  would  achieve 
large  economies  by  reducing  the  number  of  salesmen  and  sub- 
agencies  and  by  closing  the  tanneries  less  advantageously  situ- 
ated. In  spite  of  these  economies,  however,  the  immediate 
result  of  the  combination  was  failure.  During  the  first  year  of 
its  history  the  United  States  Leather  Company  showed  a  net 
loss  of  approximately  $1,340,000.  Subsequently  its  net  earn- 
ings increased,  but  in  no  year  of  its  history  did  they  warrant  the 
declaration  of  the  full  8  per  cent  dividend  on  the  preferred  stock 
which  the  original  contract  between  the  corporation  and  its  stock- 
holders required.  In  1895,  the  company  paid  6  per  cent. 
Rumors  were  circulated,  as  an  "  unauthorized  assertion  by  one 
of  the  directors,"  —  that  the  preferred  would  soon  be  put  on  the 
full  8  per  cent  basis.  The  following  year,  instead  of  this,  the 
preferred  shareholders  received  merely  i  per  cent.^  Needless 
to  say,  no  dividend  was  paid  on  the  common  stock. 

iThe  following  table  indicates  the  amount  of  dividends  paid,  the  earnings,  and 
the  accumulated  unpaid  dividends  from  the  beginning  of  the  company.  The  earn- 
ings represent  net  earnings  applicable  to  dividends,  after  the  payments  of  interest  on 
debentures.  It  is  assumed  that  the  payments  to  the  sinking  fund  of  the  debentures 
represent  a  proper  charge  to  depreciation  and  may  therefore  be  deducted  before  de- 
termining gross  earnings.     The  dividends  were  cumulative  from  May,  1893,  which 

ACCUMU- 

On  Pref.    On  Pref.  Amount  Paid 


accounts  for  the  fractions. 


Year 

May  I,  '93  to  Apr.  30,  '94 
May  I,  '93  to  Dec.  31,  '94 

1895 

1896 

1897 

1898 

1899 

1900 

1901 

1902 

1903 

1904 
Total  to  Jan.  i,  1905 
(Time  of  reorganization) 

1905 


Earnings      Earned 


Paid 

% 


ON  Pref. 
Stock 


+ 


51,340,494 

—  2 

726,473 

I.l 

9,359,833 

15 

2,017,037 

-  3 

3,237,372 

5 

1,821,921 

3 

4,947,601 

8 

2,281,511 

3 

5,888,455 

9l 

4,595,589 

7 

1,086,095 

i| 

3,645,267 

6 

535,573,080 

6,178,457 

$41,751,537 


53,736,938 

622,823 

2,958,409 

2,491,292 

3,"4,"5 

3,736,938 
3,736,938 
3,736,938 
6  3,736,938 

6  3,736,938 

—  $31,608,267 

6  3,736,938 

—  535,345,205 


4f 

4 

5 

6 

6 

6 


lated 

DiV.    ON 

Pref. 
Unpaid 


521.33 
25-33 
28.33 
31.08 
3308 
3508 
37.08 
39.08 
41.08 


43.08 


Total  surplus  from  net  earnings  at  time  of  reorganization,  Jan.  6,  1905, 13,964,813. 


378  TRUSTS,    POOLS   AND    CORPORATIONS 

The  failure  of  the  Leather  company  to  earn  the  expected 
dividends,  coupled  with  its  heavy  capitalization,  gave  both  the 
common  and  preferred  stocks  a  highly  speculative  character. 
During  1894  the  market  price  of  the  preferred  stock  ranged,  with 
considerable  fluctuation,  about  $60  a  share.  The  following 
May,  because  of  the  somewhat  larger  earnings,  and  also  the  wide 
circulation  of  that "  unauthorized  assertion  of  one  of  the  directors  " 
that  the  full  8  per  cent  would  soon  be  paid,  the  price  of  the  pre- 
ferred stock  reached  almost  its  par  value.  This  was  the  highest 
point  the  stock  attained  until  the  time  of  the  reorganization  of 
the  company  nearly  ten  years  later.  In  1896  the  company  was 
operating  its  tanneries  at  a  loss  and  the  market  price  of  the 
preferred  stock  declined  to  about  $40  per  share.  During  this 
period  the  common  stock  had  a  mere  nominal  quotation  of  $5- 

In  the  years  immediately  following,  the  stocks  of  the  Leather 
company  were  little  more  than  speculative  dice  for  Wall  Street. 
The  failure  of  the  preferred  stock  to  receive  the  full  8  per  cent 
dividends,  any  unpaid  balance  being  cumulative,  gave  that  glam- 
our of  the  unpredictable  upon  which  stock  speculation  thrives. 
The  common  stock  had  hardly  this  interest.  Speculation  is  most 
active  in  low-priced,  non-dividend  paying  securities,  but  even 
these  must  have  some  pretense  to  value,  either  actual  or  poten- 
tial. The  common  stock  of  the  Leather  company  had  neither, 
apparently.  Issued  as  a  bonus  to  the  holders  of  the  preferred 
stock  it  was  offset,  in  every  balance  sheet  of  the  company,  by 
the  highly  suggestive  phrase  "good-will,  etc."  Any  potential 
earnings  it  might  ever  have  had  were  rapidly  absorbed  by  the 
constantly  accumulating  load  of  unpaid  dividends  on  the  pre- 
ferred stock.  Its  only  possible  value  lay  in  the  voting  power  it 
carried,  and  this  was  merely  nominal,  as  the  control  was  closely 
held  by  the  original  leather  interests.  The  only  exception  to  this 
dead  level  of  neglect  in  the  eleven  years  during  which  the  common 
stock  was  quoted  on  the  New  York  Stock  Exchange  occurred  in 
November,  1899.  Ordinarily  the  stock  had  been  quoted  within 
a  narrow  range  between  $$  and  $10  per  share.  During  October 
of  that  year  it  assumed  increasing  speculative  activity  until  on 
the  25th  its  market  quotation  rose  to  $25  a  share  and  on  the  6th 
of  November  to  $40.87.     Two  days  later  it  fell  back  to  $20  a 


THE    UNITKD    STATES    LEATHER   COMPANY  379 

share,  and  by  November  29th  it  was  again  quoted  at  $jp  a  share. 
During  this  brief  period  the  original  leather  interests  disposed 
of  the  greater  part  of  their  holdings  of  common  stock,  reserving 
for  themselves  and  their  families  only  the  preferred  stock. ^  The 
episode  was  caused  by  an  attempt  on  the  part  of  James  R.  Keene 
to  "corner"  the  floating  supply  of  the  stock. ^  The  leather 
interests  in  control  of  the  company  had  nothing  to  do  with  this 
episode  and  were  annoyed  at  the  time  by  the  sudden  activity  of 
their  security. 

This  history  of  the  sole  leather  combination  to  1899  is  in  sharp 
contrast  to  the  optimism  of  its  promoters.  If  one  were  asked 
to  uncover  the  fundamental  causes  which  explain  the  contrast, 
one  would  give  three  important  reasons  for  the  failure  of  the 
company  during  the  first  years  of  its  history. 

The  most  potent  causes  for  the  early  failure  of  the  Leather 
company  lay  in  the  general  business  depression  which  prevailed 
immediately  after  its  formation.  The  company  began  its  life 
only  two  months  before  the  failure  of  the  National  Cordage 
Company  seriously  injured  the  confidence  of  people  in  industrial 
combinations,  and  only  four  months  before  the  crisis  of  1893 
reached  its  most  critical  stages.  The  first  four  or  five  years 
following  the  panic  of  1893  showed  marked  industrial  stagnation. 
It  is  certain  that,  had  the  tanners  recognized  the  full  significance 
of  the  ominous  signs  in  the  business  world  they  would  not  have 
formed  the  consolidation  at  that  time.  The  relatively  long 
time  required  for  the  manufacture  of  leather  aggravated  the 
difficulties  resulting  from  the  depression.  Between  the  purchase 
of  green  "  packer  "  hides  in  this  country  and  the  actual  sale  of 

1  The  speculative  character  of  this  episode  is  illustrated  by  the  large  volume  of 
sales.  There  were  outstanding  628,823  shares  of  common. stock.  During  the  week 
from  June  3  to  lO,  1899,  a  fair  illustration  of  the  normal  market,  350  shares  were 
sold.  During  the  week  November  4th  to  loth,  545>995  shares  were  sold,  —  nearly 
the  entire  issue  of  stock.  November  7th  was  a  holiday,  so  this  represented  an 
average  market  of  109,199  shares  a  day,  for  a  stock  which,  six  months  before,  had 
averaged  about  50  shares  a  day.  In  the  three  weeks  from  October  21st  to  Novem- 
ber lOth,  1,403,330  shares  were  sold,  over  twice  the  outstanding  stock. 

2  It  was  generally  believed  by  the  officials  of  the  Leather  company  that  Keene 
was  acting  for  one  of  the  Rockefellers  who  had  become  impressed  with  the  poten- 
tial value  of  the  company's  bark  lands  and  wished  to  acquire  a  large  interest  in 
the  company. 


38o  TRUSTS,   POOLS  AND   CORPORATIONS 

the  finished  leather  to  the  domestic  consumer,  from  six  months 
to  a  year  elapses  ;  and  between  the  purchase  of  Argentina  hides 
and  the  settlement  with  the  foreign  consumer  this  period  may 
be  extended  to  a  year  and  a  half.  At  a  time  of  faUing  prices, 
like  that  of  the  middle  nineties,  the  price  of  hides  lags  behind 
that  of  leather.  As  a  result  the  company  found  itself  repeatedly 
compelled  to  sell  leather  for  less  than  its  cost  of  production.  It 
was  embarrassed,  in  the  second  place,  by  the  large  amount  of 
unproductive  assets  for  which  it  had  issued  its  preferred  stock. 
Part  of  this  preferred  stock  was  represented  by  bark  which  it 
had  taken  over  in  the  expectation  of  an  increase  in  business. 
When  the  expectation  was  not  realized  the  heavy  stock  of  bark 
acted  as  a  dead  weight  upon  the  company.  The  bark  lands,  too, 
represented  an  investment  upon  which  8  per  cent  in  dividends 
were  accumulating,  yet  they  were  without  value  until  the  com- 
pany could  command  enough  remunerative  business  to  warrant 
their  use.  In  a  very  real  sense  the  company  was  "  land  poor," 
A  third  reason  for  lack  of  success  lay  in  the  competitive  condi- 
tions of  the  tanning  industry.  Competition  was  inevitable  and 
the  small  well-equipped  tanneries  were  in  a  strongly  intrenched 
position.  This  competition  was  not  eliminated  through  the 
combination,  as  its  promoters  had  hoped.  The  prices  of  leather 
were  fixed  on  as  competitive  a  basis  after  its  formation  as  before. 
From  the  beginning  the  Leather  company  feared  the  large, 
independent  oak  and  union  tanners,  who  controlled  more  than 
half  the  domestic  output,  since  the  oak  and  union  tanned  leather 
was  quite  largely  consumed  in  the  American  market.  The 
independent  tanners  had  on  their  side  the  advantages  of  small- 
scale  production  and  direct  personal  supervision  over  the  process 
of  manufacture.  Even  in  the  hemlock  branch  of  the  industry, 
where  the  United  States  Leather  Company  was  dominant  in 
this  country,  conditions  were  hardly  less  competitive.  A  very 
large  part  of  this  hemlock  leather,  made  from  Argentina  hides, 
was  exported  to  European  markets  where  the  American  interests 
met  the  output  of  foreign  tanners. 

From  the  formation  of  the  leather  combination,  dividends  in 
arrears  on  the  preferred  stock  accumulated.  It  was  natural, 
therefore,  that  various  efforts    should  be  made    which    looked 


THE   UNITED   STATES   LEATHER   COMPANY  381 

toward  the  adjustment  of  these  dividend  claims.  During  a 
period  of  eleven  years,  beginning  in  the  early  part  of  1899  ^"-rid 
extending  until  the  settlement  of  the  Colgate  suit  in  the  winter 
of  19 10,  the  Leather  company  was  struggling  to  rehabilitate 
itself  from  the  load  occasioned  by  these  claims.  Four  plans  of 
reorganization  were  successively  proposed  and  three  were  widely 
circulated.  All  but  the  last  met  with  utter  failure.  The  fourth 
plan  of  reorganization  accomplished  the  desired  end  only  after 
long  protracted  court  litigation.  In  it,  however,  we  are  pre- 
sented with  one  of  the  least  complicated  reorganizations  in  the 
recent  history  of  corporation  finance.  It  is  this  simplicity  which 
makes  the  United  States  Leather  Company  reorganization  im- 
portant as  a  type  of  industrial  readjustment. 

The  first  plan  of  adjustment  of  which  any  rumor  reached  the 
financial  world  was  proposed  in  the  early  part  of  1899.  At  this 
time  the  preferred  stock  itself  was  quoted  about  $75  a  share  and 
the  accumulated  unpaid  dividends  amounted  to  about  $30  a  share. 
The  plan  was  to  give  to  the  preferred  shareholders  10  per 
cent  of  script  in  lieu  of  their  claims  to  dividends.  This  proposi- 
tion to  pay  the  claims  of  a  favored  class  of  shareholders  by  script 
offers  the  simplest  kind  of  an  adjustment  of  a  contingent  liabil- 
ity. The  only  question  that  could  arise  would  be  as  to  the 
amount  of  the  script.  The  preferred  shareholders  would  de- 
mand the  full  face  value  of  their  claims  ;  the  common  share- 
holders would  naturally  refuse  this  demand  on  the  ground  that 
the  preferred  shareholders,  favored  though  they  might  be,  were 
still  stockholders,  not  bondholders,  and,  therefore,  under  an 
implied  obligation  to  bear  some  of  the  burden  of  an  enterprise 
which  proved  less  successful  than  had  been  expected.  Whether 
or  not  because  of  this  difficulty,  the  plan  failed  in  this  instance. 
It  was  not  even  presented  to  the  stockholders.  Still,  in  many 
respects,  it  was  fairer  to  all  concerned  than  any  of  the  subsequent 
plans.  It  recognized  the  justice  of  the  preferred  stockholders' 
claim,  and  in  the  attempt  to  satisfy  this  claim  it  worked  no 
hardship  on  the  corporation  itself,  nor  did  it  involve  the  sacri- 
fice of  any  nominal  though  perhaps  unreal  rights  of  the  common 
stockholders.  No  heavy  reorganization  expenses  were  involved. 
Its  great  defect  lay  in  its  failure  to  guard  against  difficulties 


382  TRUSTS,   POOLS  AND   CORPORATIONS 

arising  from  further  accumulations  of  unpaid  dividends  in  the 
future. 

In  this  last  particular  the  second  plan  of  adjustment  was  a  great 
improvement.  On  August  22,  1899,  a  committee  was  appointed 
by  the  Board  of  Directors  "to  consider  the  question  of  the  settle- 
ment of  back  dividends  on  the  preferred  stock  of  the  company  and 
the  extinction  of  the  cumulative  clause."  ^  This  committee  was 
appointed  a  short  time  after  the  first  plan  was  given  up  and  the 
two  attempts  at  adjustment  were  part  of  the  same  undertaking. 
The  committee  reported  to  the  Board  on  the  4th  of  October, 
proposing  that  the  preferred  shareholders  (i)  surrender  all  claims 
to  dividends  already  accumulated,  (2)  agree  to  the  abolJcion  of 
the  cumulative  element  of  their  contract,  (3)  accept  a  non-cu- 
mulative dividend  of  6  per  cent ;  and  that  in  consideration  of  these 
concessions  the  common  shareholders  relinquish  50  per  cent  of 
their  holdings  to  the  owners  of  the  preferred  stock.  These  pro- 
visions were  embodied  in  a  circular  submitted  to  all  stockholders 
under  date  of  October  10,  1899.  After  giving  an  outline  of  the 
plan  the  circular  goes  on  to  state  that  the  Directors  recommend 
its  acceptance  because  of  the  growing  burden  of  cumulative  divi- 
dends on  the  preferred  stock,  which  "tends  to  injure  the  good 
name'  of  the  company  and  is  unjustly  prejudicial  to  the  stocks 
as  investment."  It  is  further  suggested  that  it  might  be  desir- 
able that  the  common  stock  should  have  "a  prospect  of  more 
immediate  dividends."  At  this  time  the  Directors  held  large 
amounts  of  common  stock.  Furthermore,  it  was  urged  that 
the  removal  of  the  cumulative  feature  on  the  preferred  stock 
and  the  reduction  of  the  dividends  to  6  per  cent  would  prevent 
any  similar  trouble  in  the  future. 

This  plan,  like  the  first  one,  failed  utterly.  Out  of  622,694 
shares  of  preferred  stock  only  180,165  approved  ;  out  of  the  628,- 
694  shares  of  the  common  only  43,429  approved,  —less  than  a 
third  in  one  case,  and  less  than  a  tenth  in  the  other.  At  first 
glance  it  seems  as  though  the  plan  favored  the  preferred  share- 

1  Colgate  V.  U.  S.  Leather  Co.,  Chancery  in  N.  J.,  Hoyt  affidavit,  p.  3.  Refer- 
ence is  here  made  to  the  documents  in  the  suit  covering  the  reorganization  into  the 
Central  Leather  Company.  These  documents  afford  excellent  sources  of  material 
covering  the  various  plans  of  reorganization. 


THE   UNITED   STATES   LEATHER   COMPANY         383 

holders.     This  was  not  the  case.     The  common  stock  was  worth, 
during  October,  about  $1 1  a  share.     The  holder  of  aStTkre  of  the 
preferred  stock  was,  therefore,  giving  up  over  $30  in  accumulated 
unpaid  dividend  claims,  reHnquishing  his  charter  rights  to  2  per 
cent  dividends  each  year  and  the  cumulative  feature  attached  to 
the  remaining  6  per  cent,  and  in  return  receiving  an  amount  of 
common  stock  which  he  could  sell  on  the  market  for  $5.     The 
lapse  of  the  plan  was  due  probably  to  the  unwilHngness  on  the 
part  of  both  classes  of  stockholders  to  face  the  fact  that  the  enter- 
prise was,  when  gauged  by  the  hopes  of  the  promoters,  a  failure. 
In  the  autumn  of   1899  the  second  great  wave  of  extravagant 
optimism  in  regard  to  industrial  combinations  was  rapidly  reach- 
ing its  height.     Then,  too,  in  the  present  instance,  an  adjust- 
ment of  actual  rights  was  difficult.     No  fraud  could  be  urged  on 
either  side.     Yet  the  preferred  shareholders  held  to  the  wording 
of  their  contract,   Shylock-like   demanding   their  accumulated 
dividends  though  there  was  nothing  with  which  to  pay  them ; 
and  the  common  shareholders,  never  having  received  a  cent  in 
dividends,  regarded  the  whole  affair  as  a  snare,  and  were  un- 
willing to  relinquish  any  of  their  nominal  rights,  even  though 
the  actual  value  of  their  holdings  would  clearly  be  increased. 
The  investor  in  corporation  stock,  especially  the  small  investor 
whose  knowledge  of  the  management  is  indirect,  will  always 
gauge  the  value  of  his  property  by  nominal  rights  and  legal 
fictions  rather  than  actual  economic  value.     No  reorganization 
in  the  entire  history  of  our  railway  and  industrial  finance,  which 
involved  a  readjustment  of  interests,  was  ever  regarded  as  fair 
by  all.     The  most  glaring  defect  of  the  plan  lay  in  the  fact  that 
the  capital  liabilities  were  not  reduced.     With  over  $1 30,000,000 
of   outstanding    securities    the    company    showed    average    net 
earnings  from  its  formation  to  January  i,  1899,  of  approximately 
$2,675,000 1  per  annum  or  about  2  per  cent  on  the  total  capital. 
Had  the  committee  proposed  to  cancel  altogether  half  of  the 
common  stock  instead  of  giving  it  outright  to  the  preferred  stock- 
holders, the  plan  would  have  conformed  better  to  the  conditions. 
It  would  have  been  simpler,  too,  as  it  would  have  involved  a  sac- 

1  Including  interest  on  debentures,  an  average  of  $2,676,804. 


384  TRUSTS,    POOLS   AND    CORPORATIONS 

rifice  on  both  sides  instead  of  an  attempt  to  balance  one  set  of 
rights  by  another. 

For  some  time  after  the  faihire  of  this  plan  nothing  was  done 
toward  the  readjustment  of  the  financial  affairs  of  the  company. 
A  dividend  of  6  per  cent  was  earned  and  regularly  paid  on  the 
preferred  stock.  The  accumulated  unpaid  dividends  increased, 
therefore,  at  the  rate  of  2  per  cent  annually.  During  the  latter  part 
of  1902  the  management  became  interested  in  the  reappraisal  of 
certain  large  areas  of  hemlock  bark  lands.  These  timber  forests 
were  bought  from  the  old  leather  interests  early  in  1893  at  what 
was  then  a  fair  market  valuation.  During  the  following  ten  years 
the  value  of  both  timber  and  bark  had  increased  considerably. 
It  was  natural,  therefore,  to  suppose  that  the  lands  were  worth 
more  than  when  acquired.^  A  revaluation  was  accordingly 
made  by  certain  executive  officers  and  was  reported  to  the 
Board  of  Directors  on  May  28,  1903.  The  Committee  reported 
that  the  bark  property  was  worth  about  $14,000,000  more^  than 
the  figures  at  which  it  was  carried  on  the  company's  books. 
This  revaluation  plays  a  considerable  part  in  the  subsequent 
financial  history  of  the  company.  About  the  same  time  the 
officers  of  the  United  States  Leather  Company  caused  to  be 
incorporated  the  Central  Pennsylvania  Lumber  Company,  a 
very  large  majority  of  the  stock  of  which  —  apparently  all  ex- 
cept directors'  qualifying  shares  —  passed  directly  into  the 
treasury  of  the  Leather  company.  This  Lumber  company  took 
over  the  timber  but  not  the  bark  rights  on  the  revalued  bark 
lands.  In  payment  for  the  timber  the  Lumber  company  then 
issued  to  the  subsidiary  tanning  companies  $10,000,000  of  first 
mortgage  bonds.  These  bonds  were  transferred  by  the  sub- 
sidiary companies  to  the  treasury  of  the  United  States  Leather 
Company  —  the  holding  company  —  in  liquidation  of  dividend 
claims  or  claims  for  money  advanced. 

1  The  reason  for  this  reappraisal  was  the  desire  on  the  part  of  the  managers,  who 
then  controlled  the  preferred  stock  largely,  to  adjust  the  accumulated  dividend 
claims  on  the  basis  of  a  hidden  l:)ut  unearned  surplus.  Preferred  Stockholders' 
Circular,  May  28,   1903.     Also    Colgate  v.  U.  S.  Leather   Co.,  Hoyt  affidavit,  p.  14. 

■■^$14,235,198.10.  Colgate  V.  U.  S.  Leather  Co.,  Plum,  Additional  affidavit, 
p.  7. 


THE   UNITED   STATES   LEATHER   COMPANY         385 

On  the  same  date  that  the  report  upon  the  revaluation  of  the 
bark  lands  and  the  formation  of  the  Lumber  company  was 
received  by  the  Board  of  Directors,  that  body  issued  a  circular 
to  the  stockholders  which  embodied  a  new  plan  of  reorganiza- 
tion. In  this  it  was  suggested  that  some  of  the  surplus  brought 
to  light  by  the  revaluation  of  the  timber  be  used  to  liquidate 
the  claims  of  the  preferred  stockholders  to  accumulated  divi- 
dends by  that  time  amounting  to  $37  per  share.  In  detail  the 
plan  required  the  deposit  of  the  preferred  stock  with  the  Morton 
Trust  Company  against  negotiable  certificates.  The  Trust  thus 
created  was  to  be  administered  by  a  self-constituted  committee, 
drawn  directly  from  the  large  holders  of  preferred  stock  who 
were  then  important  on  the  directorate.  It  was  to  expire  by 
limitation  in  ten  years  unless  reconstituted  by  80  per  cent  of  the 
holders  of  the  certificates.  It  could  also  be  terminated  on  sixty 
days'  notice  by  a  majority  of  the  certificate  holders.  The 
objects  of  the  trust,  as  explicitly  defined  in  the  Trust  Agreement, 
were  to  ratify  the  issue  of  the  $10,000,000  lumber  bonds,  and 
to  devise  a  plan  whereby  some  of  the  surplus  resulting  from  the 
revaluation  could  be  divided  among  the  preferred  stockholders, 
in  consideration  of  their  claim  to  dividends  in  arrears.  The 
intent  of  the  plant  to  use  this  surplus  to  meet  the  claims  of  the 
preferred  shareholders  was  explicitly  stated  in  Article  III  of  the 
trust  agreement,  so  that  as  late  as  1903  the  directors  were  of 
the  opinion  that  the  increase  of  assets  due  to  the  higher  market 
price  of  timber  could  be  regarded  as  net  surplus  legally  applica- 
ble to  the  satisfaction  of  the  claims  of  the  preferred  shareholders. 
The  point  is  important  because  in  the  litigation  which  followed  the 
successful  reorganization  of  the  company  the  point  was  denied 
by  some  of  these  same  men  who  had  earlier  made  the  proposal. 

This  plan  failed,  like  the  two  preceding  ones.  Its  adoption 
required  a  deposit  of  at  least  80  per  cent  of  the  outstanding  pre- 
ferred stock,  — upwards  of  500,000  shares.  On  December  23  the 
committee  announced  the  lapse  of  the  plan,  since  only  243,728 
shares  had  consented  to  the  Agreement.  The  reasons  for  the 
failure  of  the  plan  of  1903  lay  in  the  conditions  under  which  it 
was  proposed.  In  the  broad  purpose  of  rehabilitating  the  credit 
of  the  company  no  possible  fault  could  be  found.     The   plan, 


386  TRUSTS,    POOLS   AND   CORPORATIONS 

unlike  the  preceding  one,  involved  no  balancing  of  rights  be- 
tween preferred  and  common  shareholders.  It  demanded  no 
pecuniary  sacrifices,  no  reorganization  proceedings  in  the  broad 
sense  of  the  term.  Yet  the  trust  created  by  the  preferred  stock- 
holders was  to  be  administered  under  most  exacting  conditions. 
Title  to  the  stock  was  to  pass  to  the  Trust  company  under  an 
Agreement  the  actual  workings  of  which  were  controlled  abso- 
lutely by  a  small  committee  in  the  management  of  the  Leather 
company.  Beneath  the  outward  form  of  the  Agreement  there 
was  involved  the  actual  surrender  of  the  rights  of  the  preferred 
shareholders  with  no  certain  assurance  that  these  rights  would 
be  protected  by  the  trustee.  Nor  did  the  Agreement  stipulate 
that  the  Morton  Trust  Company  should  obtain  a  settlement  of 
all  the  dividends  in  the  arrears.  It  was  merely  required  to  pay 
over  to  the  registered  holders  of  the  beneficiary  certificates  6  per 
cent  per  annum,  and  so  much  more,  after  deducting  expenses,  as 
the  Leather  company  saw  fit  to  pay  over  to  the  trustee.  The 
Agreement,  owing  to  the  phraseology  of  the  original  certificate 
of  incorporation,  required  at  the  outset  the  assent  of  over  80  per 
cent  of  the  preferred  stock  ;  it  could  be  maintained  for  ten  years 
by  the  approval  of  50  per  cent.  The  management,  who  were  to 
operate  the  Trust  through  their  own  committee,  could  easily  con- 
trol this  amount.  In  brief  the  plan  had  primarily  in  view  the 
acquisition  of  control  of  the  preferred  stock  through  the  medium 
of  a  voting  trust.  This  was  less  emphasized  than  the  intention 
of  adjusting  the  accumulated  dividends. 

The  managers,  being  large  holders  of  preferred  stock,  were 
actively  in  favor  of  this  Agreement.  They  believed  confidently 
that  the  reorganization  would  go  through.  In  view  of  this  the 
President  and  four  members  of  the  Board  of  Directors  acquired, 
at  the  instigation  of  counsel,  on  syndicate  account,  50,000  shares 
of  the  common  stock.  It  was  the  intention  of  the  members  of 
the  syndicate  to  turn  over  the  stock,  -at  cost,  to  interests  favor- 
ably inclined  to  the  new  company,  and  thus  constitute  a  voting 
trust  which  should  control  the  United  States  Leather  Company. 
Such  a  control,  friendly  to  the  management,  was  considered 
expedient  as  the  outstanding  common  stock,  of  little  market 
value,  exceeded  the  issue  of  preferred  stock.     The   syndicate 


THE   UNITED   STATES   LEATHER   COMPANY         387 

acquired  the  stock  during  January,  February,  and  March,  1903, 
before  the  pubhcation  of  the  revaluation  of  the  bark  lands.  As 
the  Agreement  failed  of  adoption  the  syndicate  suffered  a  loss 
for  over  a  year.  It  was  finally  able  to  liquidate  its  holdings 
during  October  arid  November,  1904,  on  the  expectation  of  the 
consummation  of  the  fourth  and  last  plan  of  reorganization. 

After  the  failure  of  this  third  plan  of  adjustment  in  Decem- 
ber, 1903,  nothing  was  done  further  until  April,  1904,  when 
Nathan  Allen,  a  large  holder  of  preferred  stock,  conferred  with 
Vice  President  Healy  of  the  United  States  Leather  Company 
regarding  the  cooperation  of  Armour  and  Company,  producers 
of  green  hides.  Allen  had  already  had  considerable  dealings 
with  Armour  &  Company.  Some  months  later  a  meeting  was 
arranged  between  P.  A.  Valentine,  of  Armour  &  Company,  and 
Vice  President  Healy.  This  meeting  took  place  in  Chicago  in 
the  late  summer  and  with  it  began  the  negotiations  which  ended 
finally  in  the  reorganization  of  the  United  States  Leather  Com- 
pany into  the  Central  Leather  Company. 

From  the  very  beginning  the  leather  combination  had  been 
weak  in  its  control  over  the  market  in  which  it  bought  its  hides. 
It  seemed  clear  that  if  the  Chicago  packers  could  be  induced  to 
cooperate  in  the  management  of  the  company,  a  great  and  per- 
manent trade  advantage  would  be  insured.  The  Armours  had 
their  price.  At  first  they  asked  $9,000,000  of  stock  in  the 
reorganized  company,  but  "after  serious  and  protracted  dis- 
cussion the  amount  of  $6,200,000  was  finally  fixed."  ^  This 
ample  allotment  to  the  Chicago  packers  was  not  considered  a 
gift.  On  the  contrary  it  was  widely  heralded  that  the  Armours 
would  sell  their  hides  to  the  United  States  Leather  Company 
on  more  favorable  terms  than  they  extended  to  other  tanners. 

^  It  is  believed  by  the  writer  from  informatiDn  ueiived  from  reliable  but  indirect 
sources  that  the  amount  first  proposed  by  Valentine  was  ten  million  instead  of  nine 
as  stated  in  the  affidavit,  and  that  the  final  agreement  on  ^6,200,CXX) — lo  per  cent 
of  the  outstanding  common  stock  —  was  due  to  one  of  the  Armour  representatives 
who  had  charge  of  the  sale  of  their  hides.  It  was  the  plan  of  the  Armour  representa- 
tives before  entering  the  conference,  to  begin  their  negotiations  on  the  basis  of  a 
high  figure  anil  gradually  work  down  in  accordance  with  the  attitude  of  the  Leather 
Directors.  Afterwards  they  expressed  surprise  that  the  leather  interests  acceded  to 
so  high  a  figure. 


388  TRUSTS.    POOLS   AND   CORPORATIONS 

The  good  will  and  the  cooperation  of  the  packers  were  supposed 
to  have  a  pecuniary  value.  Yet  the  real  advantage  to  the 
Leather  company  arising  from  the  coveted  cooperation  is  prob- 
lematical. The  agreement  between  the  Armours  and  the  com- 
mittee of  the  Leather  company  required  that  the  former  parties 
pay  for  the  expenses  of  the  reorganization.  Considerable  ex- 
pense was  involved  in  the  underwriting,  for  the  Armour  interests 
agreed  to  acquire  sufficient  stock  in  the  United  States  Leather 
Company  to  insure  the  consummation  of  the  plan.  Another 
large  expense  was  a  fee  of  $15,000  to  each  of  the  five  members 
of  the  committee  of  the  management  of  the  Leather  company 
with  whom  the  plan  was  negotiated.  Yet,  and  here  is  the 
weakest  point  in  the  whole  agreement,  the  Armours  did  not  agree 
to  sell  hides  to  the  United  States  Leather  Company  on  better 
terms  than  those  extended  to  its  competitors,  nor  did  the  Armours 
agree  to  retain  their  stock.  There  was  absolutely  nothing  in 
the  agreement  to  prevent  the  Armours,  once  in  command  of 
the  situation,  from  administering  the  Leather  company  in  the 
interest  of  their  packing  business.  Should  they  fail  in  this, 
they  could  sell  their  stock  on  the  open  market  and  withdraw 
their  coveted  cooperation.  Before  the  plan  of  reorganization 
was  published,  while  negotiations  were  in  progress  with  Vice 
President  Healy  and  others,  the  Armour  interests  bought  150,000 
shares  of  the  common  stock  of  the  United  States  Leather  Com- 
pany, ostensibly  to  vote  for  the  resulting  plan  and  thereby  insure 
its  acceptance.  The  common  stock  was  then  selling  in  the 
neighborhood  of  Sio  a  share.  In  the  course  of  the  negotiations 
the  Armour  interests  stood  out  clearly  in  every  particular  for 
the  interests  of  the  common  as  against  those  of  the  preferred 
stock,  and  the  reorganization  presently  to  be  consummated 
was  of  manifest  benefit  to  the  common  stock,  since  it  would 
remove  the  burden  of  accumulated  dividends  on  the  preferred 
stock.  When  the  plan  was  made  public  the  price  of  the  com- 
mon stock  rose  to  $15  and  later  $21  per  share. 

The  final  agreement  between  the  various  interests  was  framed 
in  New  York  in  the  early  part  of  December,  1904,^  and  the  re- 

1  The  definite  understanding  between  the  parties  was  concluded  early  in  Novem- 
ber but   was  not  made  public  until  later.     This   is  proved  conclusively  from  the 


THE   UNITED   STATES    LEATHER   COMPANY         389 

suiting  plan  of  reorganization  bore  the  date  of  DeoeiJibcr  17th. 
The  circular,  which  announced  the  plan  to  the  public,  gave 
certain  specific  reasons  for  its  adoption.  Among  them  were  (i) 
that  the  working  balance  originally  obtained  from  the  $6,000,000 
debenture  bonds  was  insufficient,  and  (2)  that  "  the  establishment 
of  closer  relations  with  interests  with  which  the  company  nec- 
essarily has  large  dealings  and  the  vesting  in  them  of  substantial 
accounts  of  the  securities  of  the  company,  and  especially  of  its 
common  stock,  will  be  a  material  benefit  to  the  company  and  to 
both  classes  of  its  stockholders."  To  accomplish  these  pur- 
poses the  committee  of  the  Directors  proposed  to  form  a  new 
company  that  should  acquire  the  physical  assets  of  the  United 
States  Leather  Company.  The  securities  of  the  United  States 
Leather  Company  were  to  be  exchanged  for  those  of  the  new 
company  on  the  following  basis :  For  each  share  of  the  old  pre- 
ferred stock  was  to  be  given  50  per  cent  of  first  mortgage  5  per 
cent  bonds,  50  per  cent  of  new  7  per  cent  cumulative  preferred 
stock  and  a  bonus  of  23I  per  cent  of  new  common  stock.  Each 
share  of  old  common  stock  was  to  receive  only  30  per  cent  of 
new  common  stock,  —  each  ten  shares  of  old  stock  being  con- 
sidered equivalent  to  three  shares  of  new  stock.  The  reorgan- 
ized company  itself  had  $80,000,000  of  stock,  divided  equally 
into  7  per  cent  cumulative  preferred  stock  and  common  stock. 
In  addition  it  was  proposed  to  authorize  an  issue  of  $45,000,000 
of  first  mortgage  bonds.  The  issue  of  United  States  Leather 
Company's  debentures  was  allowed  to  remain  undisturbed.  The 
distribution  of  the  capital  items  of  the  two  companies  may  be 
seen  at  a  glance  from  the  table  given  on  the  next  page. 

It  will  be  observed  that  the  fixed  charges  are  reduced  by  an 
amount  equivalent  to  2  per  cent   on  the  old   preferred    stock. 

Valentine  affidavit.  On  page  143,  line  10,  Valentine  states  "  neither  Mr.  Armour 
nor  I  was  the  owner  of  or  in  any  wise  interested  in  a  single  share  of  the  stock  of 
said  Company,  either  Common  or  Preferred,  nor  did  either  of  us  become  such  owner 
or  so  interested  until  after  the  general  or  structural  features  of  the  plan  of  December 
17,  1904,  had  been  practically  agreed  on  with  Messrs.  Hoyt,  Healy,"  etc.  Later  in 
the  same  affidavit  (page  145,  line  8)  this  same  Valentine  states  that  he  and  Mr. 
Armour  "  purchased,  in  the  open  market,  during  November  and  December,  1904, 
.  .  .  150,000  shares  of  Common  Stock.  .  .  ."  Colgate  v.  Leather  Co.,  Valentine 
affidavit.     Also  Hoyt  affidavit,  p.  42. 


390 


TRUSTS,    POOLS   AND    CORPORATIONS 


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THE   UNITED   STATES    LEATHER   COMPANY  391 

Leaving  aside  the  interest  on  the  outstanding  debenj^ires,  which 
remained  the  same  for  both  corporations,  the  reorganized  com- 
pany called  for  the  payment  of  about  $  i  ,500,000  on  the  new  bonds 
and  $2,200,000  on  the  new  preferred  stock.  The  total  charges 
were  therefore  a  little  over  $3,700,000,  an  amount  exactly  equal 
to  6  per  cent  on  the  old  preferred  stock.  The  average  net  earn- 
ings of  the  old  Leather  company,  from  its  inception  to  the  end  of 
December,  1904,  had  been  a  little  over  $3,000,000.  The  proposal 
of  the  reorganization  was  therefore  far  from  conservative.  One 
of  the  most  important  items  in  any  plan  of  reorganization  is  the 
change  in  capitalization.  Is  the  total  capitalization  increased  or 
decreased  while  the  actual  assets  remain  unchanged  .''  Counting 
the  underlying  debentures  as  the  same  in  both  cases  (in  round 
numbers  $5,000,000)  the  capital  liability  of  the  old  company 
stood  at  $130,000,000,  that  of  the  new  company,  including  the 
bonus  of  common  stock  to  the  Armours  but  excluding  the 
amounts  reserved  for  "additional  properties"  and  "general 
purposes,"  at  $107,000,000.  This,  it  will  be  observed,  repre- 
sents a  slight  reduction  in  capitalization,  and  if  the  $6,000,000 
given  to  the  Armours  is  still  further  subtracted  the  reduction  is 
more  marked.  Considering,  however,  that  the  securities  bear- 
ing charges  remain  essentially  unchanged,  and  that  the  common 
stock,  which  alone  is  reduced  in  amount,  was  given  originally  as 
a  bonus,  the  reduction  in  capitalization  is  not  as  significant  as 
might  at  first  sight  appear.  Furthermore  one  should  observe 
that  the  United  States  Leather  Company  was  capitalized  during 
the  earlier  period  of  industrial  promotion,  when  the  issuing  of 
bonds  was  seldom  considered  conservative.  The  new  company 
was  burdened  by  over  $30,000,000  of  bonds  carrying  upwards  of 
$1,500,000  in  fixed  charges,  a  failure  to  pay  the  interest  on  which 
might  throw  the  company  into  bankruptcy.  The  strength  of 
the  old  company,  in  its  practical  freedom  from  fixed  charges, 
was  sacrificed  in  order  to  reduce  the  contingent  charges  and 
obtain  new  working  capital.  Viewed  in  the  perspective  of  con- 
servative finance  it  is  doubtful  if  the  sacrifice  was  worth  while. 
Yet  in  the  minds  of  the  officers  of  the  company  the  consumma- 
tion of  the  plan  of  reorganization  seemed  likely  to  secure  the 
advantages  of  a  more  liberal  charter,  the  coveted  cooperation  of 


392  TRUSTS,   POOLS   AND    CORPORATIONS 

a  powerful  group  of  packers,  the  extinction  of  the  claim  to  un- 
paid dividends  and  a  subsequent  improvement  in  general  credit, 
the  reduction  of  capital  charges,  and  the  acquisition  of  better 
facilities  for  obtaining  bank  credit. 

Before  attempting  to  estimate  the  inherent  justice  of  the  plan, 
one  must  consider  the  question  of  the  status  of  the  timberland 
surplus  of  the  United  States  Leather  Company.  This  surplus, 
it  will  be  remembered,  arose  from  an  increased  valuation  placed 
upon  the  company's  large  hemlock  forests.  The  timber  of  these 
forests,  but  not  the  bark,  had  been  sold  to  a  subsidiary  company 
and  the  increased  value  of  the  lands  was  represented  partially 
by  bonds  of  this  concern  in  the  treasury  of  the  United  States 
Leather  Company.  It  was  argued  by  the  Directors  and  those 
who  believed  that  the  terms  offered  the  preferred  shareholders 
were  just,  that  this  revaluation  surplus  could  not  be  used  rightly 
for  the  adjustment  of  their  accumulated  dividends.  The  origi- 
nal contract  between  the  corporation  and  its  preferred  share- 
holders stated  that  dividends  should  be  paid  only  out  of  net 
earnings.  Increase  in  the  value  of  real  property  could  not  be 
construed  as  net  earnings.  Moreover,  the  revaluation  was 
based  on  the  assumption  that  the  Leather  company  was  a  "go- 
ing concern,"  a  contention  which  seemed  to  imply  that  the  new 
value  placed  upon  the  lands  was  excessive  if  the  property  was 
to  be  sold  in  the  open  market.  In  opposition  to  these  views 
those  who  considered  the  plan  unfair  to  the  holders  of  the  pre- 
ferred stock  pointed  out  that  timber  representing  the  increase 
in  value  of  the  bark  lands  had  been  sold  and  the  Leather  com- 
pany had  received  merchantable  securities  in  payment.  These 
securities  were,  therefore,  net  earnings  and  could  be  rightfully 
used  to  liquidate  the  claims  to  unpaid  dividends.  To  reenforce 
their  position  they  reverted  to  the  circular  sent  to  the  stock- 
holders in  May,  1903,  in  which  the  same  Directors  declared 
explicitly  that  the  surplus  belonged  to  the  preferred  stockholders 
for  the  settlement  of  their  dividend  claims.  The  question  is 
certainly  an  interesting  one  from  the  point  of  view  of  account- 
ancy. Its  solution  would  seem  to  depend,  in  the  opinion  of  the 
present  writer,  upon  the  intent  behind  the  sale  of  the  timber  to 
the  subsidiary  company.      If  this  transfer  actually  represented 


THE    UNITED   STATES    LEATHER   COMPANY         393 

a  bona  fide  sale  of  property  without  involving  a  coxrcspondin^ 
diminution  of  capital  assets,  then  the  profits  were  certainly  a 
part  of  the  net  profits  of  the  business  and  could  be  used  legiti- 
mately to  reduce  the  outstanding  obligations  to  the  preferred 
shareholders.  If,  on  the  contrary,  the  formation  of  a  subsidiary 
corporation  involved  only  a  legal  "fiction  and  the  transfer  of  lum- 
ber to  it  indicated  no  bona  fide  sale,  then  the  profits  arising  were 
certainly  not  net  profits  and  could  not  be  used  to  liquidate  the 
claims  of  the  preferred  shareholders.  The  question,  unfortu- 
nately, was  not  passed  upon  by  the  court,i  when  the  whole  re- 
organization came  under  its  review. 

The  question  of  the  fairness  with  which  the  preferred  stock- 
holders were  treated  is  one  of  particular  importance  in  this 
reorganization  since  there  adjustment  of  capital  was  entirely 
voluntary  on  the  part  of  the  stockholders.  It  followed  no  legal 
failure  nor  was  it  suggested  as  the  solution  of  financial  difficulties 
which  might  lead  to  bankruptcy.  It  was  based  on  grounds  of 
general  expediency  alone,  and  no  plan  of  financial  readjustment 
can  be  permanently  expedient  which  is  not,  at  the  same  time, 
fair  to  all  interests  concerned.  Setting  aside  the  question  of 
accountancy,  as  to  whether  or  not  the  bark  land  surplus  was 
strictly  chargeable  to  the  company's  profit  and  loss  account,  it 
would  seem  that  the  justice  of  the  reorganization  was  defensible 
upon  either  of  two  fines  of  evidence,  —  the  actual  value  of  the 
property  at  issue  or  the  market  value  of  the  various  securities 
concerned  in  the  reorganization.  That  is,  the  fairness  of  the 
reorganization  can  be  tested  by  the  equity  or  inventory  value 
of  the  assets  behind  the  preferred  stock  ;  or  by  the  market  value 
of  the  securities  before  and  after  the  consummation  of  the  re- 
organization. 

When  we  consider  the  former  of  these  two  questions,  we  must 

1  Two  of  the  leading  cases  regarding  the  legal  status  of  a  surplus  in  excess  of  a 
Stock  liability  are  Williams  v.  Western  Union  Telegraph  Co.  (93  N.Y.  162)  and 
Roberts  v.  Roberts-Wicks  Co.  (184  NA'.  257).  In  the  former  Earl,  J.,  states  that 
when  the  property  of  a  corporation  exceeds  its  capital  stock  "such  surplus,  in  a  rtrict 
legal  sense,  is  not  a  portion  of  its  capital  and  is  always  regarded  as  surplus  profits  " 
(p.  188).  And  in  the  second  case,  Gray,  J.,  said  "  When  the  property  of  a  corpora- 
tion has  accumulated  in  excess  of  its  chartered  capital,  the  excess  may  be  regarded 
and  dealt  with  as  constituting  a  surjjlus  of  profits  "  (p.  266). 


394  TRUSTS,    POOLS   AND    CORPORATIONS 

remember  that  at  the  time  the  tanneries  and  bark  lands  were 
acquired  in  1893  there  was  little  doubt  in  the  minds  of  the  tan- 
ners but  that  they  were  paid  for  in  preferred  stock  on  the  basis 
of  a  fair  valuation.  The  $6,000,000  of  debenture  bonds  were 
issued  for  money,  the  bankers  taking  their  commission  in  com- 
mon stock.  This  money  was'  invested  directly  in  the  business. 
We  may  therefore  say,  for  the  purposes  of  this  accounting,  that 
the  properties  of  the  Leather  company  were,  on  a  fair  market 
valuation,  originally  worth  the  face  value  of  the  preferred  stock 
and  the  debentures,  $68,283, 300.^  On  January  i,  1905,  a  fair 
date  for  comparison,  the  United  States  Leather  Company  had 
acquired  a  surplus  from  the  net  earnings  of  $3,964,813,  and  a 
surplus  from  the  revaluation  of  the  bark  lands  of  $14,235,198, 
making  a  total  surplus  of  $18,200,011.  The  small  surplus  from 
net  earnings  had  been  largely  invested  in  the  properties,  so  that 
on  January  i,  1905,  a  fair  valuation  of  the  physical  properties 
of  the  Leather  company  would  be  about  $86,483,311,  and  from 
this  subtracting  the  debentures,  —  on  January  i,  1905,  $5,280,- 
000,  —  it  appears  that  the  preferred  stock  of  $62,283,300  was 
represented  by  actual  physical  property  to  the  value  of  about 
$8,203,311.  The  surplus  to  the  preferred  shareholders  was 
therefore  about  $18,920,011.  This  represented  $30.38  a  share. 
The  accumulated  unpaid  dividends  amounted  then  to  41  per 
cent  so  that  it  is  quite  right  to  say  that  the  claim  for  unpaid  divi- 
dends was  worth  about  seventy-five  cents  on  the  dollar.  For  this 
$30.38  per  share  of  actual  property  the  preferred  shareholders 
were  asked  to  accept  23^  per  cent  in  new  common  stock.  On  the 
basis  of  the  market  quotation  of  $1 5  per  share  for  the  old  common 
stock  this  allowance  was  worth  $11.75.  Li  other  words,  for  a 
legal  claim  to  $41  per  share  and  an  actual  inventory  surplus  of 
$30.38  per  share  the  preferred  holders  were  asked  to  accept 
securities  the  market  value  of  which  was  $11.75.^  From  such 
a  statement  of  the  case  it  would  seem  that  the  reorganization 
was  unfair  to  the  owners  of  the  preferred  stock.     And  if  we, 

^  As  a  going  business.     Tangible  assets  worth  at  least  $60,000,000. 

^  These  estimates  can  be  summarized  in  the  following  table.  They  assume  that  an 
adequate  depreciation  charge  was  made  each  year.  This  assumption  is  borne  out  by 
the  fact  that  the  company  charged  its  capital  account  with  the  bark  it  consumed, 


THE   UNITED    STATES   LEATHER   COMPANY         395 

further,  turn  to  the  equity  value  of  this  allowance  Sit  common 
stock  the  story  is  not  very  different.  The  new  common  stock 
would  have  an  equity  value,  if  the  reasoning  suggested  in  the 
preceding  paragraph  is  approximately  correct,  of  about  $18,920,- 
01 1  of  actual  property.  Dividing  the  equity  value  by  the  par 
value  proposed  to  be  issued,  we  reached  the  conclusion  that  each 
share  of  the  new  common  stock  had  a  property  value  back  of  it 
of  about  $48.  The  preferred  stockholders  were  to  receive  23I 
per  cent  of  their  holding  in  this  common  stock  in  consideration 
of  their  claim  to  unpaid  dividends.  In  property  value  this  23^^ 
per  cent  of  common  stock  had  an  equity  back  of  it  of  only  about 
$11.  From  these  figures  it  appears  again  that  the  plan  of  re- 
organization was  unfair  to  the  preferred  shareholders.^ 

But  there  were  other  considerations  than  the  mere  adjustment 
of  inventory  values.  If  we  turn  to  the  market  prices  of  the  pre- 
ferred shares  as  affected  by  the  reorganization,  the  story  presents 
another  side.  The  rehabilitation  of  the  company's  finances 
was  undoubtedly  of  general  advantage  to  the  credit  of  the  cor- 

while  it  maintained  and  improved  its  tanneries  out  of  earnings.  The  bonds  were 
being  retired  by  a  small  sinking  fund. 

Eqiiity  Value  of  Preferred  Stock   Claim 

Surplus  from  net  earnings  May  i,  1893,  to  January  i,  1905       .  ^3,964,813 

Surplus  —  revaluation  of  bark 14,235,198 

Total  surplus,  Jan.  1,1905 $18,200,011 

Preferred  stock 62,283,300 

Debentures 6,000,000 

Original  property  investment 68,283,300 

Total  physical  property,  Jan.  1,1905 86,483,311 

Debentures  outstanding 5,280,000 

Equity  to  preferred  stock 81,203,311 

Surplus  to  preferred  stock 18,920,011 

Surplus  per  share  of  preferred  stock S^-S^ 

Accumulated  unpaid  dividends 41.08 

Percentage  of  actual  property  to  preferred  claim     ....  74'/n 

Market  value  of  the  2.l\%  new  stock  offered  (on  basis  of  $15 

for  old  stock) ^ii-75 

'  The  computation  is  based  on  the  following  presumptions : 
Equity  to  new  common  stock  (from  preceding  note)   .      .      .  $18,920,011 

Common  stock  outstanding  against  this 39,701,030 

Equity  value  per  share $48.00 

Equity  value  of  23^  %  offered 1I.28 


396  TRUSTS,    POOLS  AND   CORPORATIONS 

poration.  This  fact  is  clearly  shown  by  the  improvement  in  the 
market  quotations  of  its  securities.  During  the  first  six  months 
of  the  year  1904,  before  the  publication  of  any  plan  of  reorgani- 
zation on  the  hnes  sketched  above,  the  preferred  stock  had  an 
average  market  valuation  of  $7d>  a  share.  During  the  time  the 
plan  was  being  worked  out,  the  stock  rose  steadily  in  value  and 
soon  after  the  plan  was  made  public  it  was  quoted  at  $106  a 
share.  During  the  first  half  of  1905  the  market  price  of  the  stock 
averaged  $108  a  share,  and  during  the  last  half  $115  a  share.  It  is 
very  clear,  therefore,  in  spite  of  the  estimates  outlined  in  the  pre- 
ceding paragraph,  based  as  they  were  upon  inventory  value  rather 
than  on  market  quotations,  that  the  reorganization  was  of  mani- 
fest pecuniary  benefit  to  the  preferred  shareholders.  Irrespective 
of  any  inventory  value,  the  plan  would  seem  to  be  fair  to  the 
preferred  stockholders,  since  the  market  value  of  their  shares 
increased  by  an  amount  approximately  equal  to  the  unpaid 
claims  to  dividends.  These  two  lines  of  reasoning  bring  into 
clear  contrast  the  two  different  points  of  view  about  which  all 
estimates  of  the  justice  of  a  voluntary  reorganization  center. 
According  to  a  computation  based  on  inventory  values  the  pre- 
ferred shareholders  were  unfairly  treated ;  but  if  the  estimate 
is  based  on  the  enhancement  of  the  value  of  their  securities  in 
the  open  market,  because  of  the  supposed  advantages  of  the 
reorganization,  one  must  presume  that  they  were  treated  with 
the  utmost  liberality.  It  is  a  question  of  the  same  order  as  is 
frequently  presented  in  financial  readjustments,  one  that  em- 
phasizes the  importance  of  intangible  factors  in  determining  the 
value  of  corporate  securities. 

The  plan  of  reorganization  just  sketched  did  not  meet  with 
immediate  and  unqualified  approval.  Aside  from  the  grum- 
blings of  both  preferred  and  common  stockholders,  —  grum- 
blings that  always  appear  no  matter  how  fair  any  plan  may  be, 
—  the  two  points  which  called  for  the  most  general  condemna- 
tion were  the  gift  of  over  $6,000,000  of  common  stock  to  the 
Armours  and  the  slight  consideration  given  to  the  accumulated 
dividend  claim  of  the  preferred  shareholders.  However,  by 
February  15,  1905,  413,143  shares  of  the  preferred,  and  429,997 
of  the  common  stock  had  been  deposited  with  the  Central  Trust 


THE    UNITED    STATES    LEATHER    COMPANY         397 

Company  of  New  York,  and  on  the  following  day  the^Qommittee 
announced  that  the  plan  was  operative.  On  April  12,  1905,  the 
Central  Leather  Company  was  incorporated  under  the  Corpora- 
tion Act  of  New  Jersey  of  1893,  which  permitted  of  a  more 
liberal  charter  than  the  old  Corj5oration  Act  of  1875,  under 
which  the  United  States  Leather  Company  had  been  incorpo- 
rated. Soon  thereafter,  about  May  23d,  the  interim  certificates 
of  the  Central  Trust  Company  were  exchanged  for  the  bonds 
and  stocks  of  the  Central  Leather  Company  in  accordance  with 
a  plan  of  exchange  outlined  in  an  earlier  paragraph.^ 

In  the  years  immediately  following  the  reorganization,  the 
two  companies  were  in  a  legal  sense  separate  concerns.  This 
separation,  however,  was  little  more  than  a  legal  fiction.  The 
directors  of  the  United  States  Leather  Company  were  directors 
in  the  new  Central  Leather  Company.  The  two  companies 
had  identical  offices  and  the  same  places  of  business.  Although 
at  first  merely  a  holding  corporation,  the  Central  Leather  Com- 
pany immediately  began  to  acquire  and  to  operate  competing 
tanneries.  They  obtained  the  tanneries  of  L.  Beebe  and  Sons, 
N.  R.  Allen's  Sons  Co.,  Cover  and  Drayton,  V.  A.  Wallin  and 
Co.,  and  certain  smaller  interests.  For  these  additional  prop- 
erties payment  was  made  partly  in  treasury  bonds  and  stocks 
and  partly  by  the  sale  of  these  same  securities.  The  Central 
Leather  Company  represented,  therefore,  almost  from  its  in- 
ception, an  interesting  example  of  an  operating  and  a  holding 
company  in  one.  Beginning  July  i,  1905,  the  full  dividends 
were  paid  on  the  preferred  stock  of  the  Central  Leather  Com- 
pany. The  few  outstanding  stockholders  of  the  United  States 
Leather  Company  apparently  had  no  alternative  other  than  to 
accede  to  the  terms  of  exchange  still  proffered  them  or  to  sell 
their  stock  in  the  market  to  agents  of  the  management  who  stood 
ready  to  buy  it  at  a  liberal  price.     With  only  a  small  minority 

1  The  number  of  sales  of  the  United  States  Leather  Company  stock  diminished 
to  insignificance  and  those  of  the  Central  Leather  Company  assumed  some  appear- 
ance of  speculative  activity.  A  large  amount  of  tiie  floating  supply  of  the  old 
stock  was  acquired  in  the  interests  of  the  reorganization  and  by  the  close  of  1906, 
575,180  shares  of  the  preferred,  or  92  per  cent  of  the  total  issue,  and  614,828  shares 
of  the  common  stock,  or  97  per  cent  of  the  total  issue,  were  in  the  control  of  the 
new  company.     Colgate  v.  Leather  Co.,  Hammond  aflidavit,  "Exhibit  A,"  p.  146. 


398  TRUSTS,    POOLS  AND   CORPORATIONS 

interest  of  the  United  States  Leather  Company  outstanding  the 
management  sought  to  simplify  the  organization  by  a  merger 
of  the  two  corporations.  On  December  i8,  1906,  official  notices 
were  sent  to  the  stockholders  of  both  companies  stating  that 
there  would  be  stockholders'  meetings  of  both  companies  on 
January  16,  1907.  The  immediate  purpose  of  these  was  stated 
as  the  "adoption  or  rejection  of  a  joint  agreement,  dated  De- 
cember 8,  1906,  entered  into  by  the  Directors  respectively  of  the 
United  States  Leather  Company  and  the  Central  Leather  Com- 
pany for  the  merger  and  consolidation  of  the  two  corporations 
on  the  terms  and  conditions  of  said  Agreement  set  forth  and  in 
accordance  with  the  statutes  of  New  Jersey."  The  Agreement 
mentioned  was  merely  the  Agreement  between  identical  direc- 
tors and  officers  of  the  two  companies  to  merge.  It  offered  the 
outstanding  stockholders  of  the  old  United  States  Leather  Com- 
pany the  terms  of  exchange  by  which  the  Central  Leather  Com- 
pany had  originally  acquired  the  majority  of  the  stock. 

In  the  notice  to  the  stockholders  reference  was  made  to  the 
statutes  of  New  Jersey.  At  the  time  in  question,  1907,  these 
required  only  a  two-thirds  vote  of  the  stockholders  of  two  corpo- 
rations to  ratify  a  merger.  Since  the  Central  Leather  Company 
then  controlled  over  95  per  cent  of  the  United  States  Company's 
stock  the  plan  had  apparently  been  actually  accomplished,  ex- 
cept for  legal  formalities.  But  the  "  best  laid  schemes  "  of  even 
astute  corporation  lawyers  "gang  aft  agley."  A  firm  of  New 
York  bankers,  James  B.  Colgate  and  Company,  entered  into  an 
agreement  with  a  number  of  the  outstanding  minority  share- 
holders of  the  old  Leather  company  to  contest  the  merger  in 
the  hope  of  compelling  the  company's  management  to  buy 
the  minority  interest  at  a  higher  price  than  that  accorded  the 
majority  of  the  stock.  Accordingly  two  suits  were  brought 
with  that  object  in  view  on  January  12th,  just  four  days  before 
the  special  meeting  at  which  it  was  proposed  to  ratify  the  agree- 
ment of  merger.  It  is  beside  our  present  purpose  to  review  the 
litigation  in  any  detail.  We  may  note  in  passing,  however,  the 
interesting  question  concerning  the  powers  of  stockholders  de- 
rived from  the  statutes  under  which  a  corporation's  charter  is 
granted  ;  do  the  statute  rights  of  the  original  shareholders  lapse 


THE   UNITED    STATES    LEATHER   COMPANY  399 

when  they  transfer  their  stock  to  other  persons  ?  This  somewhat 
academic  query  assumed  importance  because  the  corporation 
laws  of  New  Jersey  were  changed  less  than  a  month  after  the  for- 
mation of  the  United  States  Leather  Company  and  the  rights  of 
stockholders  covering  the  merger  of  corporations  were  different 
according  as  they  were  derived  from  the  earlier  or  the  later  statute. 
The  courts  did  not  render  a  final  decision  on  this  question. 

The  subsequent  steps  of  the  reorganization  can  be  told  briefly. 
Vice  Chancellor  Emory,  who  delivered  the  opinion  of  the  lower 
court  in  the  application  for  an  injunction  pendente  lite,  overruled 
most  of  the  contentions  of  the  Colgate  complainants.  He  held, 
•however,  that  the  merger  violated  the  rights  of  the  preferred 
stockholders  of  the  United  States  Company  in  that  it  required 
them  to  accept  the  securities  of  the  new  Central  Leather  Com- 
pany in  lieu  of  their  claim  for  unpaid  dividends.  With  this 
decision  in  mind,  the  directors  of  the  two  corporations  then  pre- 
sented to  the  stockholders  a  modified  agreement  under  date  of 
October  10,  1907,  permitting  the  dissenting  minority  stockholders 
to  retain  "any  lawful  right  .  .  .  to  receive  any  dividends  accrued 
and  unpaid."  The  lower  court  then  modified  the  preliminary 
injunction  to  the  extent  of  allowing  this  agreement  to  be  sub- 
mitted to  the  stockholders  of  the  companies  for  approval. 
From  this  decision  of  the  lower  court  the  original  complainants, 
Colgate  and  others,  appealed  to  the  Court  of  Errors  and  Appeals. 
The  case  was  argued  in  the  higher  court  June  24,  1908,  and  a 
decision  was  rendered  by  Chancellor  Pitney  the  first  of  March 
following.  The  court  expressed  itself  very  forcibly  against  the 
merger  on  the  ground  of  the  difference  between  the  charters  of 
the  two  companies.  The  original  United  States  Leather  Com- 
pany, organized  early  in  1893,  obtained  merely  an  old-fashioned 
charter  which  permitted  it  to  conduct  the  leather  business,  but 
said  nothing  about  running  railroads  or  doing  a  hundred  other 
things  which  find  their  way  into  modern  corporation  charters. 
The  lawyers  of  the  Central  Leather  Company  obtained  for  their 
clients  a  typical  New  Jersey  charter  based  on  the  Corporation 
Law  of  1893  which  permitted  the  corporation  to  do  anything 
outside  the  state  of  New  Jersey  that  it  saw  fit  to  do,  —  for  instance, 
to  operate  railroads.     The  statutes  dealing  with  the  merger  of 


400  TRUSrS,    POOLS   AND  CORPORATIONS 

corporations,  even  those  connected  with  the  Corporation  Act  of 
1893,  required  that  the  two  corporations  to  be  merged  should  be 
organized  for  the  purpose  of  carrying  on  businesses  "  of  the  same 
or  a  similar  nature."  ^  Yet  it  should  be  remarked  that  the  old 
corporation  operated  railroads,  even  though  nothing  to  that  effect 
was  mentioned  in  the  original  charter.  It  may  be  inferred  that 
the  case  was  decided  merely  on  technical  grounds,  and  that  the 
important  and  essential  points  in  the  controversy  were  left 
undecided. 

On  the  announcement  of  this  decision  a  stockholders'  meeting 
was  called  to  modify  the  charter  of  the  Central  Leather  Com- 
pany so  that  the  charters  of  the  two  companies  should  more 
nearly  agree.  This  was  done  on  August  19,  1909.  Mean- 
while rumors  of  settlement  out  of  court  became  current  in  banking 
circles.  It  was  pointed  out,  rightly  perhaps,  that  the  general 
opinion  of  the  higher  court,  aside  from  the  difference  in  charters, 
was  unfavorable  to  the  proposed  merger.  This  being  so,  the 
leather  companies  would  do  well  to  "settle"  with  the  minority 
stockholders  rather  than  risk  another  hearing.  On  September 
23,  1909,  the  Colgate  suit  was  withdrawn  and  the  terms  of  settle- 
ment were  made  public  a  few  days  later.  An  offer  was  made 
by  the  Central  Leather  Company  to  the  minority  holders  of  the 
old  United  States  Leather  Company's  stock  which  embodied  an 
alternative.  The  stockholders  could  either  accept  for  each 
Share  of  old  preferred  stock  $50  in  first  mortgage  bonds,  $55  of 
the  Central  Leather  Company  preferred  stock  taken  at  no,  and 
$2S  in  cash,  or  else  $50  in  bonds,  $50  in  preferred  stock,  23^ 
per  cent  in  common  stock,  and  $10  in  cash.  This  second  offer 
was  identical  with  the  original  offer  in  the  plan  of  reorganiza- 
tion with  the  addition  of  a  bojins  of  $10  a  share.  On  a  basis  of 
market  values  there  was  little  to  choose  between  these  two 
offers  and  one  or  other  was  almost  immediately  accepted  by 
practically  all  the  remaining  stockholders  of  the  United  States 
Leather  Company.^ 

1  The  United  States  Leather  Company,  as  a  corporation,  is  still  maintained  with 
a  nominal  capitalization  of  $100,000.  It  is  only  a  selling  company.  During  the 
comparatively  long  period  of  the  existence  of  the  old  company  the  name,  The 
United  States  Leather  Company,  '-ecame  widely  known  among  the  buyers  of  leather, 
and  its  prestige  was  high. 


THE   UNITED    STATES    LEATHER   COMPANY         401 

Althoui^h  the  contestants,  Colgate  and  others,  seepjed  to  be 
fighting  for  the  rights  of  a  small  minority,  a  large  part  of  those 
who  joined  the  suit  were  actuated  by  no  such  lofty  ideals  of 
abstract  justice.  Many  of  them  acquired  their  stock  long  after 
the  plan  of  reorganization  was  made  public  and  some  even  after 
the  suit  had  passed  through  the  preliminary  stages  of  trial. 
These  men  enterpd  the  contest  with  no  purpose  of  defending 
rights  already  existent.  They  had  a  speculative  interest  only. 
Reduced  to  its  simplest  terms  they  believed  they  were  in  a  posi- 
tion, by  restraining  the  merger,  to  compel  the  management  to 
offer  exorbitant  terms  of  settlement.  All  reorganization  pro- 
ceedings are  impeded  by  the  horde  of  gamblers  who  stand  ready 
to  buy,  on  a  speculative  basis,  almost  any  security  of  doubtful 
value  and  then  to  clamor  loudly  for  the  abstract  justice  of  their 
rights. 

It  is  not  difficult  to  summarize  the  history  and  final  reorgani- 
zation of  the  United  States  Leather  Company.  Conceived 
originally  at  a  most  unfortunate  time  the  combination  had  to 
face,  at  the  very  outset,  the  most  trying  period  of  the  last  thirty 
years.  It  operated  in  a  business  where  the  burden  of  a  long 
depression  and  falling  prices  was  particularly  heavy.  Had  the 
company  been  heavily  capitalized  with  bonds  instead  of  pre- 
ferred stock  it  would  have  succumbed.  But  since  the  capital 
charges  were  contingent,  they  could  be  postponed.  As  a  result 
the  unpaid  dividends  began  to  accumulate  during  the  first  year 
of  the  company's  history  and  acted  as  a  burden  during  its  entire 
existence.  The  company  did  not  suffer  from  the  administration 
of  inferior  men.  The  first  president  of  the  United  States  Leather 
Company,  Mr.  Procter,  was  said  to  have  been  the  ablest  man 
in  the  leather  business.  But  it  is  improbable  that  there  exist 
men  of  sufficient  business  ability  to  manage  a  large  tanning 
business  producing  upwards  of  ^$50,000,000  worth  of  leather  a 
year  with  the  same  skill  that  the  man  of  ordinary  endowments 
could  manage  a  small  tannery.  During  the  first  few  years  the 
company  felt  no  need  of  additional  working  capital  as  is  shown 
by  the  fact  that  two  fifths  of  the  issue  of  $10,000,000  of  debenture 
bonds  were  never  sold.  But  beginning  with  the  trade  expansion 
which  set  in  about  1899  this  need  began  to  be  felt.     So  that  in 


402  TRUSTS,    POOLS   AND    CORPORATIONS 

the  successful  reorganization  of  the  company  the  provisions  for 
an  ampler  working  capital  were  quite  as  important  as  the  relief 
from  the  burden  of  accumulated  dividend  charges.  The  reor- 
ganization turned  on  the  consent  of  the  preferred  stockholders 
to  suffer  a  reduction  in  income  and  the  common  stockholders  a 
reduction  in  the  par  value  of  their  security.  As  a  result  both 
the  capital  charges  and  the  capitalization  w.ere  reduced.  In 
these  respects  the  reorganization  is  typical  of  most  industrial 
reorganizations  and  in  contrast  to  most  railroad  reorganizations. 
It  is  its  simplicity  that  makes  the  history  of  the  United  States 
Leather  Company  significant  for  the  general  study  of  industrial 
finance. 


XII 

UNITED    STATES    SHIPBUILDING    COMPANY^ 

Incorporation 

THE  United  States  Shipbuilding  Company  was  incorporated 
on  June  17,  1902,  under  the  laws  of  the  state  of  New 
Jersey.  The  incorporators  were  Howard  K.  Wood,  Horace  S. 
Gould,  and  Kenneth  K.  McLaren.  .  .  .  The  incorporators  col- 
lectively subscribed  for  fifteen  shares  of  the  preferred  and  fifteen 
shares  of  the  common  stock  of  the  company. 

On  June  24,  1902,  the  incorporators  above  named,  constituting 
the  stockholders  of  the  company,  held  their  first  meeting.  .  .  . 
At  this  meeting  Frederic  K.  Seward  was  elected  a  director  for 
one  year,  Raymond  Newman  was  elected  a  director  for  two 
years,  and  Louis  B.  Dailey  was  elected  a  director  for  three 
years,  the  minutes  of  the  company  reciting  that  Howard  K. 
Wood,  one  of  the  incorporators  and  subscribers  to  the  stock, 
had  assigned  his  right  to  one  share  of  common  stock  to  each 
of  the  persons  above  named  to  quaUfy  them  as  directors.  No 
stock  of  the  United  States  Shipbuilding  Company,  however, 
was  issued  to  or  placed  in  the  name  of  these  directors,  so  far  as 
the  records  of  the  company  disclose. 

On  the  said  24th  day  of  June,  1902,  the  first  meeting  of  the 
directors  of  the  United  States  Shipbuilding  Company  was  held. 
At  this  meeting  there  were  present  Louis  B.  Dailey,  Raymond 
Newman,  and  Frederic  K.  Seward,  being  all  of  the  directors. 
The  minutes  recite  that  the  Board  proceeded  to  the  election  of 
ofificers  for  the  ensuing  year,  and,  ballots  having  been  cast  and 
counted,  it  was  found  that  Raymond  Newman  had  been  elected 

1  From  Report  of  James  Smith,  Jr.,  Receiver,  filed  Oct.  31,  1903  ;  United  States 
Circuit  Court,  District  of  New  Jersey,  /?.  R.  Conklin,  et  al.  v.  United  States  Ship- 
building Co.  [Condensed  by  omission  of  immaterial  parts  and  legal  repetitions.] 
For  additional  references,  see  p.  43S. 

403 


4o6  TRUSTS,    POOLS   AND   CORPORATIONS 

(2)  For  the  purpose  of  further  securing  said  issue  of  $10,000,000 
of  bonds,  your  Company  shall  also  procure  to  be  executed  and  delivered 
to  the  New  York  Security  &  Trust  Company,  the  single  bond  of  the 
Bethlehem  Steel  Company  payable  to  said  Trust  Company  for  the  sum 
of  $10,000,000  gold  coin,  with  interest  thereon  at  the  rate  of  five  per 
centum  .  .  .,  conditioned  for  the  due  payment  of  the  principal  and 
interest  of  said  issue  of  $10,000,000  of  bonds,  etc. 

(3)  That  an  agreement  shall  be  executed  between  the  Bethlehem 
Steel  Company  and  your  Company,  by  which  said  agreement  your  com- 
pany shall  undertake  to  guarantee  so  long  as  any  of  said  issue  of 
$10,000,000  bonds  are  outstanding,  that  the  Bethlehem  Steel  Company 
shall  pay  dividends  upon  its  capital  stock  at  the  rate  of  Three  Dollars 
per  share  per  year,  aggregating  an  annual  dividend  contribution  of 
$900,000,  and  for  that  purpose  that  your  Company  will  supply  and 
furnish  said  Bethlehem  Steel  Company  .  .  .  business  and  .  .  .  means 
of  earning  to  enable  it  to  pay  said  annual  dividends  ...  or  advance 
sufficient  money  ...  to  make  such  annual  dividend  payments  which 
may  be  credited  on  any  business  or  work  which  said  Bethlehem  Steel 
Company  may  thereafter  have  for  or  on  account  of  your  Company.  Said 
agreement  shall  further  provide  that  so  long  as  any  of  said  issue  of 
$10,000,000  bonds  remain  outstanding,  said  Bethlehem  Steel  Company 
shall  be  protected  in  keeping  on  hand  and  maintaining  cash  or  cash 
assets  of  not  less  than  $4,000,000  cash  value  over  and  above  its  current 
business  liabilities  (not  including  its  present  and  projected  issue  of 
bonds)  as  its  working  capital,  no  part  of  which  shall  at  any  time  be  used 
or  applied  towards  the  payments  of  dividends  or  for  purposes  other 
than  the  operation  and  conduct  of  the  business  of  said  Bethlehem  Steel 
Company. 

(4)  That  so  long  as  any  of  said  $10,000,000  bonds  are  outstanding 
said  Bethlehem  Steel  Company  shall  always  remain  an  independent  and 
distinct  corporation,  and  shall  not  be  merged  in  or  consolidated  .  .  . 
unless  .  .  .  requested  or  consented  to  by  the  holders  of  not  less  than 
75  per  cent  of  said  outstanding  bonds. 

(5)  That  your  Company  may  at  any  time  pay  all  of  said  outstanding 
bonds  as  an  entirety  by  depositing  a  sum  equal  to  the  par  value  .  .  . 
with  interest  ...  to  the  New  York  Security  &  Trust  Company  as 
trustee. 

I  will  cause  to  be  delivered  to  your  Company  suitable  deeds,  bills  of 
sale  and  transfers,  etc. 

*  ******* 

(Signed)        John  W.  Young 


UNITED    STATES   SHIlTiUILDINC.    COMPANY  407 

Upon  the  receipt  of  this  offer  the  directors  above  named,  holding 
no  stock  whatever  in  the  Company,  but  at  most  a  mere  subscriptive 
right,  by  assignment,  to  one  share  each,  adopted  the  following 
resolution  : 

Acceptance  by  Company 

Whereas,  John  W.  Young  has  offered  to  convey,  sell,  etc., 
.  .  . ;  and, 

Whereas,  In  the  judgment  of  this  Board  the  value  of  the 
properties  so  offered  ...  is  at  least  the  par  value  of  the  stocks 
and  bonds  of  this  Company  proposed  to  be  issued  therefor,  to 
wit,  the  sum  of  $70,997,000,  and  said  properties  are  necessary 
for  the  business  of  this  Company  ; 

Resolved,  That  said  offer  be  and  the  same  is  hereby  accepted, 
etc.,  .  .  . 

Further  resolved,  That  for  the  purpose  of  enabling  this  Com- 
pany to  accept  the  foregoing  offer,  it  shall  as  soon  as  practicable 
take  the  steps  required  by  law  for  the  increase  of  its  authorized 
capital  stock  from  thirty  shares  of  $100  each  ...  to  four 
hundred  and  fifty  thousand  shares  of  $100  each,  two  hundred 
thousand  shares,  of  which  shall  be  preferred  stock,  and  two 
hundred  and  fifty  thousand  shares  of  which  shall  be  common 
stock,  making  a  total  authorized  capital  stock  of  $45,000,000.  .  .  . 

Further  resolved,  That  the  officers  of  this  Company  be,  and 
they  hereby  are  authorized  and  directed  to  make  ...  to  the 
Mercantile  Trust  Company  as  Trustee,  a  mortgage  or  deed  of 
trust  upon  the  properties  purchased  pursuant  to  the  offer  of 
said  John  W.  Young  (exclusive  of  the  shares  of  stock  of  the 
Bethlehem  Steel  Company),  to  secure  the  payment  of  $16,000,000 
par  value  of  first  mortgage  5  per  cent  thirty-year  sinking  fund 
gold  bonds,  etc.,  .  .  . 

Further  resolved,  That  the  proper  officers  of  this  Company  be 
and  they  hereby  are  authorized  and  directed  to  make  ....  a 
mortgage  or  deed  of  trust  to  the  New  York  Security  &  Trust 
Company  as  Trustee,  of  the  shares  of  the  capital  stock  of  the 
Bethlehem  Steel  Company  ...  to  secure  the  payment  of 
$10,000,000  par  value  of  the  5  per  cent  twenty-year  gold  bonds 
of  this  Company,  which  mortgage  shall  contain  the  provisions 
required  under  the  terms  of  said  offer,  etc.,  .  .  . 


4o8  TRUSTS,    POOLS   AND    CORPORATIONS 

Further  resolved,  That  the  officers  of  this  Company  are  hereby 
authorized  to  execute,  issue,  and  deliver  to  the  said  Young  .  ,  . 
the  first  mortgage  .  .  .  gold  bonds  of  this  Company  of  the 
aggregate  par  value  of  $16,000,000,  .  .  .  $10,000,000  and  cer- 
tificates for  199,985  shares  of  the  preferred  capital  stock  .  .  . 
and  for  249,985  shares  of  the  common  capital  stock,  etc. 

Increase  of  Capital  Stock 

On  the  same  day,  to  wit,  the  twenty-fourth  day  of  June,  .  ,  . 
a  meeting  of  the  stockholders  of  said  Company  was  held  for 
the  purpose  of  authorizing  and  increasing  the  capital  stock 
of  the  United  States  Shipbuilding  Company  and  of  considering 
and  acting  upon  the  offer  of  said  John  W.  Young.  There  were 
present  Frederic  K.  Seward,  Louis  B.  Dailey,  Kenneth  K. 
McLaren,  Horace  S.  Gould,  Howard  K.  Wood,  and  Raymond 
Newman,  claiming  to  be  holders  of  fifteen  shares  of  preferred 
and  fifteen  shares  of  common  stock  of  the  United  States  Ship- 
building Company,  being  all  the  capital  stock  of  said  Company. 
At  this  meeting  the  following  resolution  was  adopted : 

Resolved,  That  the  action  of  the  Board  of  Directors  ...  be 
.  .  .  approved,  ratified,  and  confirmed,  etc. 

At  a  meeting  of  the  Board  of  Directors  of  the  United  States 
Shipbuilding  Company  held  on  July  31,  1902,  the  following 
resolution  was  adopted  : 

The  Board  of  Directors,  etc.,  do  hereby  resolve  and  declare 
that  it  is  advisable  that  the  capital  stock  of  this  Company  be 
changed  from  thirty  shares  ...  to  four  hundred  and  fifty 
thousand  shares  ...  of  capital  stock,  etc. 


Purchase  of  Subsidiary  Plants 

Between  the  fifth  day  of  August,  1902,  and  the  twelfth  day 
of  August,  1902,  in  evident  compliance  with  the  offer  of  said 
John  W.  Young  and  the  acceptance  thereof  .  .  .  the  companies 
.  .  .  conveyed  to  the  United  States  Shipbuilding  Company  all 
their  real  and  personal  property.  .  .  . 


I 


UNITED    STATES   SHIPBUILDING    COMPANY  409 

Leases  to  Subsidiary  Companies-"^ 

Your  Receiver  further  reports  that  after  the  delivery  of  said 
deeds  .  .  .  leases  were  entered  into  between  the  United  States 
Shipbuilding  Company  and  the  (various  companies  hereinbefore 
named).  .  .  .  By  the  terms  of  these  leases  "  all  the  yards, 
docks,  and  plant,"  etc.,  were  leased  to  the  above  named  con- 
stituent companies  "  al  the  yearly  rent  or  sum  of  the  net  profits 
of  the  said  party  of  the  second  part  in  its  business  during  the 
term  of  this  lease."  ...  In  the  Union  Iron  Works  lease  the 
entire  plant  and  property  were  leased  for  one  year  to  the  Union 
Iron  Works  for  the  nominal  rental  of  one  dollar.  All  such  leases 
were  terminable  on  five  days'  notice. 

Alleged  Basis  of  Directors'  Actions 

The  resolution  of  the  Board  of  Directors  of  the  United  States 
Shipbuilding  Company  accepting  the  offer  of  John  W.  Young, 
above  set  forth,  was  stated  by  said  Board  in  its  minutes  to  be 
based  upon  a  report  in  writing  from  Messrs.  W.  T.  Simpson, 
Fellow  Institute  Accounts,  New  York,  and  Riddell  and  Common, 
Chartered  Accountants,  on  the  condition  of  the  business  of  the 
several  companies  mentioned  in  said  offer,  excepting  the  Bethle- 
hem Steel  Company.  This  report  is  alleged  to  have  certified, 
among  other  things,  that  the  contracts  of  the  constituent  com- 
panies for  construction  then  in  hand  amounted  to  over  thirty-six 
millions  of  dollars.  That  the  time  necessary  to  complete  the 
work  contracted  for  averaged  about  eighteen  months  from  Jan- 
uary first,  nineteen  hundred  and  two,  and  that  the  estimated  net 
profits  thereon  had  been  calculated  at  over  five  millions  of  dol- 
lars. That  new  work  was  being  constantly  offered,  and  this 
new  work,  replacing  completed  contracts  from  time  to  time, 
should  result  in  the  realization  of  an  average  annual  profit  on 
work  in  hand  and  in  sight  of  two  million  two  hundred  and 
twenty-five  thousand  dollars. 

With  reference  to  the  Bethlehem  Steel  Company,  the  minutes 
of  the  Board  of  Directors  recite  that  Messrs.  Jones,  Caesar  & 
Company,  chartered  accountants,  had  been  investigating  the 
affairs  of  the  Bethlehem  Steel  Company,  and  had  made  a  report 


4iO  TRUSTS,    POOLS  AND   CORPORATIONS 

that  the  company  was  earning  at  the  rate  of  one  million  eight 
hundred  thousand  dollars  per  year ;  that  it  had  a  working  capi- 
tal of  over  four  millions  of  dollars,  and  that  it  had  contracts  in 
hand  sufficient  for  its  full  running  capacity  for  three  years.  In 
reliance  upon  these  alleged  reports,  and  without  knowledge  of, 
or  investigation  into,  the  merits  of  the  properties,  the  resolution 
in  question  was  adopted. 

Acts  of  the  Directors 

A  comparison  of  the  figures  alleged  to  have  been  relied  upon 
by  the  Board  of  Directors  in  accepting  the  offer  of  John  W. 
Young,  with  the  true  figures  ascertained  from  an  examination 
of  the  subsidiary  companies  subsequent  to  the  purchase  of  said 
plants,  discloses  so  great  a  variance  as  to  impel  the  belief  that 
the  figures  contained  in  the  minutes  were  wilfully  misstated.  It 
is  extremely  doubtful  whether  any  report  was  submitted  by  any 
accountants  made  as  of  that  time,  as  the  minutes  recite.  In  a 
certain  Prospectus  marked  "  Private  and  Confidential,"  bearing 
date  the  19th  day  of  April,  1902,  there  is  contained  a  letter  pur- 
porting to  be  signed  by  Messrs.  Simpson  and  Riddell  and  Common, 
under  date  of  January  24th,  1902,  which  letter  would  seem  to 
serve  as  a  basis  to  a  certain  extent  for  the  allegation  in  the  min- 
utes of  the  Board  of  Directors.  If  the  examination  of  these 
accountants  was  made  as  of  January  ist,  1902,  as  the  letter 
would  imply,  it  must  have  been  of  the  most  superficial  kind. 
The  letter  in  question  makes  such  exaggerated  representations 
with  reference  to  the  profits,  present  and  prospective,  as  to  make 
it  absolutely  worthless  as  a  guide  in  ascertaining  the  real  con- 
dition of  the  plants.  It  is  entirely  refuted  by  their  later  reports 
and  detailed  statements  made  as  of  June  30th  and  July  31st,  1902. 

Your  Receiver  has  seen  and  inspected  the  statements  made  by 
these  accountants  as  of  June  thirtieth,  nineteen  hundred  and 
two,  and  July  thirty-first,  nineteen  hundred  and  two,  and  finds 
nothing  therein  to  support  the  statements  contained  in  the 
minutes  of  the  Board  of  Directors. 

The  statement  of  Messrs.  Simpson  and  Riddell  and  Common 
of  the  condition  of  the  subsidiary  plants  as  of  June  thirtieth, 
nineteen  hundred  and  two,  contains,  among  other  things,  the 
following:  fissures : 


UNITED   STATES   SHIPBUILDING   COMPANY         411 

1.  Contract  price ,^^-^34,377,408.70 

2.  Value  of  work  done  under  said  contracts  up  to  June  30,  1902      .        13,771,768.96 

3.  Value  of  work  to  be  done  under  said  contracts  subsequent  to     

June  30,  1902 ^20,605,639.74 

The  report  of  these  accountants  also  contained  a  statement 
of  the  volume  of  business  done  by  the  constituent  companies 
for  the  three  years  ending  June  thirtieth,  nineteen  hundred  and 
two,  on  which  the  profit  was  shown  to  be  about  ten  per  cent. 
The  report  also  shows  that  the  contracts  remaining  unfinished 
on  June  thirtieth,  nineteen  hundred  and  two,  would  require  three 
years  for  their  completion. 

From  this  report  the  following  facts  clearly  appear : 

1.  That  the  amount  of  contracts  on  hand  June  thirtieth, 
nineteen  hundred  and  two,  instead  of  being  Thirty-six  Millions 
of  Dollars,  as  recited  in  the  minutes  of  the  Board  of  Directors, 
was  $15,394,360.26  less  than  the  amount  therein  stated. 

2.  That  it  would  take  three  years  to  earn  whatever  profit 
was  involved  in  these  contracts,  instead  of  eighteen  months, 
as  alleged  in  the  minutes. 

3.  That  the  profits  on  such  contracts,  instead  of  amounting 
to  $5,000,000,  as  the  minutes  recite,  basing  the  estimate  upon 
the  past  earnings  contained  in  the  report,  would  be  about  two 
millions  of  dollars ;  and, 

4.  That  the  statement  that  the  average  annual  profit  on  work 
in  hand  and  in  sight  of  the  constituent  companies,  exclusive  of 
the  Bethlehem  Steel  Company,  was  $2,225,000,  appears  to  have 
no  more  substantial  basis  than  the  wildest  conjecture. 

AMOUNT   OF   CONTRACTS,   JULY   31,  1902 

Your  Receiver  has  caused  to  be  prepared  a  statement  showing  the 
contracts  in  force  on  the  31st  day  of  July,  1902,  the  portion 
thereof  completed,  the  balance  remaining  uncompleted,  and  the 
estimated  profit  thereon,  based  upon  the  highest  possible  estimate 
of  earnings,  which  is  annexed  hereto  marked  "  Schedule  No.  2," 
and  made  a  part  thereof.  From  this  statement  it  appears  that 
the  face  value  of  the  contracts  on  hand,  including  extras,  on 

July  31,  1902,  was 534,097,739.23 

The  value  of  work  done  on  said  contracts  up  to  July  31,  1902,  was  .       14,295,195.15 

Leaving  the  value  of  the  uncompleted  work  on  said  contracts  on     

July  31,  1902 ^19,802,544.08 


412  TRUSTS,    POOLS   AND   CORPORATIONS 

Estimated  Earnings  on  Such  Contracts 

Adopting  the  figures  of  the  accountants  and  estimating  profit 
on  the  basis  of  percentage  of  completion  reported  by  them  and 
the  actual  cost  of  such  percentage,  the  highest  possible  estimate 
of  earnings  on  the  balance  of  the  contracts  to  be  completed 
would  be  ^2,203,269.83,  as  appears  from  said  "  Schedule  No.  2." 

An  examination  of  the  books  of  the  Company,  however,  with 
care  and  the  exercise  of  some  intelligence,  and  adjusting  the 
amount  of  the  contracts  at  corrected  figures,  would  have  shown 
that  there  was  no  basis  for  the  foregoing  figures,  but  that  there 
might  be  justification  for  an  estimated  profit  of  $1,660,021.59, 
as  appears  from  the  statement  hereto  annexed,  made  a  part  here- 
of and  marked  "  Schedule  No.  3." 

An  examination  as  of  August  i,  1903,  however,  with  the  past 
year's  work  as  a  basis,  and  allowing  for  changes  in  extras,  dis- 
closes another  set  of  figures  and  shows  that  the  profit  on  such 
uncompleted  contracts  cannot  exceed  the  sum  of  $1,078,261.42, 
as  appears  from  the  statement  hereto  annexed,  made  a  part 
hereof  and  marked  "  Schedule  No.  4." 

From  this  latter  Schedule,  which  is  based  upon  the  actual 
cost  of  the  work,  so  far  as  ascertainable,  a  situation  is  disclosed 
so  much  at  variance  with  the  figures  alleged  to  have  been 
relied  upon  by  the  Board  of  Directors  as  to  lead  to  the  belief 
that  the  minutes  of  the  Board  of  Directors  in  this  respect  must 
have  been  wilfully  falsified.  The  Five  Millions  of  profits  dwindle 
to  about  One  Million ;  the  contracts  therein  referred  to  will  not 
be  completed  for  upwards  of  three  years,  and,  judging  from  past 
experiences,  it  is  safe  to  say  that  this  estimated  profit  will  suffer 
great  depreciation  before  the  completion  of  the  contracts. 

Working  Capacity  of  Plants  in  Relation  to  Earnings 

So  far  as  your  Receiver  is  able  to  ascertain,  the  full  capacity 
of  the  yards,  exclusive  of  the  Bethlehem  Steel  Company,  is 
about  fourteen  million  dollars  of  work  annually,  while  twelve 
million  dollars  is  an  average  volume  of  work.  From  the  figures 
contained  in  the  report  of  the  Messrs.  Simpson  and  Riddell  and 


UNITED    STATES   SHIPBUILDING    COMPANY  413 

Common,  it  appears  that  the  average  profit  of  the  xarcls  for  the 
three  years  preceding  their  purchase  by  the  United  States  Ship- 
building Company  did  not  exceed  ten  per  cent.  Upon  this  basis 
the  average  annual  profit  derived  from  the  yards,  on  the  basis 
of  the  capacity  above  stated,  would  not  exceed  a  million  four 
hundred  thousand  dollars. 


Earnings  for  the  Year  ending  August  i,   1903 

This  basis,  however,  is  no  guide  to  the  actual  earnings  of 
the  constituent  companies.  After  being  in  operation  for  one 
year  under  the  control  of  the  United  States  Shipbuilding  Com- 
pany, the  earnings  of  the  constituent  companies,  exclusive  of 
the  Bethlehem  Steel  Company,  instead  of  being  $2,225,000,  as 
alleged  by  the  Directors,  or  $1,400,000,  as  figured  on  the  above 
basis  of  ten  per  cent,  did  not  exceed  $833,458.74,  as  appears 
from  "  Schedule  5,"  hereto  annexed  and  made  a  part  hereof. 

It  has  been  suggested  that  the  poor  showing  in  regard  to 
earnings  is  due  to  the  increased  cost  of  labor  and  material 
during  the  past  year.  It  is  true  that  the  cost  of  labor  was 
greater  during  the  past  year  than  the  previous  years,  and  that 
there  were  some  losses  occasioned  by  strikes ;  but  it  is  also  true 
that,  by  reason  of  the  combination  of  all  the  yards  under  one 
management  and  the  attempted  control  thereof  by  the  United 
States  Shipbuilding  Company,  there  should  have  been  a  great 
reduction  in  the  management  expenses.  This  reduction  in 
expense,  however,  did  not  come  to  pass,  and  one  reason  for  it 
may  be  found  upon  an  examination  of  the  offer  of  Young,  above 
set  forth.  In  this  offer  it  will  be  found  that  in  the  case  of  the 
Union  Iron  Works,  Eastern  Shipbuilding  Company,  Samuel  L. 
Moore  &  Sons'  Company,  Bath  Iron  Works,  and  the  Hyde 
Windlass  Company,  it  was  provided  that  the  United  States 
Shipbuilding  Company  should  enter  into  contracts  with  certain 
persons  therein  named  for  upwards  of  five  years  at  salaries, 
in  many  instances,  greater  than  the  earnings  of  the  subsidiary 
company  would  warrant.  The  acceptance  of  this  offer,  there- 
fore, with  these  conditions  imposed,  not  only  reduced  the  earn- 
ings of  the  subsidiary  companies,  but  left  the  officers  in  charge 


414  TRUSTS,    POOLS   AND    CORPORATIONS 

thereof  practically  free  from  interference  by  the  Board  of 
Directors  of  the  United  States  Shipbuilding  Company  for  a 
period  of  five  years,  a  fact  that  must  necessarily  have  had  con- 
siderable influence  upon  the  management  and  earnings  of  the 
individual  plants.  This  fact,  however,  does  not  wholly  explain 
the  failure  of  the  earnings  of  the  constituent  companies  to  reach 
the  amount  of  earnings  estimated  in  the  preliminary  reports. 
The  real  reason  why  the  earnings  fell  below  the  anticipated 
profits  was  because  previous  alleged  earnings  had  been  figured 
upon  a  percentage  of  completion  of  contracts,  which  percentage 
in  many  instances  was  erroneous.  For  instance,  in  the  case  of 
the  torpedo  boats  "Nicholson"  and  "O'Brien,"  it  was  stated 
that  these  boats  were  fully  completed.  As  a  matter  of  fact 
there  was  subsequently  expended  thereon  the  sum  of  $56,271.04, 
and  it  is  estimated  that  upwards  of  $20,000  is  still  needed  to 
complete  these  boats.  Your  Receiver,  therefore,  respectfully 
submits  that  the  method  of  arriving  at  profits  earned  previous 
to  the  combination  was  practically  worthless  for  the  purpose  of 
ascertaining  accurate  results,  and  led  to  the  inaccuracies  in  the 
estimates  for  the  future. 

Bethlehem  Steel  Company 

In  regard  to  the  Bethlehem  Steel  Company,  the  minutes  of  the 
Board  of  Directors  with  reference  to  the  offer  of  the  said  Young, 
recite  that  an  investigation  of  the  affairs  of  that  company  dis- 
closes that  it  was  earning  at  the  rate  of  $1,800,000  a  year,  and 
that  it  had  a  working  capital  of  over  $4,000,000.  For  the  two 
years  preceding  the  adoption  of  the  resolution  in  question  by  the 
directors  the  earnings  of  the  Bethlehem  Steel  Company  for  the 
fiscal  year  ending  the  thirtieth  day  of  April  were  as  follows : 

1900-1901 $381,403.83 

1901-1902 978,743.81 

From  these  figures,  as  to  the  earnings  of  the  Bethlehem  Steel 
Company,  which  are  made  up  from  the  report  submitted  by  the 
Bethlehem  Steel  Company,  it  appears  that  the  earnings  of  that 
company  at  the  time  of  the  adoption  of  the  resolution  were 
much  below  the  amount  alleged  in  the  minutes  of  the  Board  of 


UNITED    STATES   SHIPBUILDING    COMPANY  415 

Directors  of  the  United  States  Shipbuilding  Company.,  and  that 
there  was  then  no  justification  for  the  use  of  such  figures. 

It  also  appears  that  the  working  capital  of  the  Bethlehem  Steel 
Company  at  the  close  of  their  fiscal  year  on  the  thirtieth  day  of 
April,  nineteen  hundred  and  two,  was  not  over  $4,000,000,  but  was 
at  least  $250,000  less  than  such  amount,  as  hereinafter  set  forth. 

Working  Capital 

From  the  report  of  Messrs.  Simpson  and  Riddell  and  Common, 
as  of  July  31st,  1902,  not  made,  however,  until  after  the  proper- 
ties had  been  acquired  and  paid  for,  it  appears  that  the  working 
capital  of  the  constituent  companies,  exclusive  of  the  Bethlehem 
Steel  Company,  was  $3,278,798.48.  The  figures  making  up  this 
total  were  subsequently  found  to  be  excessive  in  the  case  of 
nearly  every  company,  the  shrinkage  amounting  to  $1,450,367.41, 
s'o  that  the  working  capital  of  the  constituent  companies  was  but 
$1,828,43  L.07,  as  appears  from  the  statement  hereto  annexed, 
marked  "  Schedule  No.  6,"  and  made  a  part  hereof.  From  the 
statement  hereto  annexed,  marked  "  Schedule  No.  7,"  and  made 
a  part  hereof,  it  appears  that  with  the  exception  of  the  Union 
Iron  Works,  the  subsidiary  companies,  taken  together,  had 
absolutely  no  working  capital;  but  on  the  contrary  their  liabilities 
exceeded  their  resources  in  the  sum  of  $294,719.33.  By  refer- 
ence to  this  schedule  it  appears  that  the  following  was  the  con- 
dition of  said  companies  at  the  time  of  their  purchase : 

DEFICIT 

Bath  Iron  Works $3,518.74 

Crescent  Shipyard  Company  .......  403,192.28 

Harlan  &  HoUingsworth  Co.         ......     73,813.44 

S.  L.  Moore  &  Sons'  Company       ......       5,039.27 

SURPLUS 
Eastern  Shiplmikling  Company      ......     $1,391.34 

Hyde  Windlass  Company       .......   189,453.06 

$190,844.40 


Net  Deficit  being  excess  of  Liabilities  over  Assets .         .         .  $294,719.33 

From  an  examination  of  "  Schedules  6  and  7,"  it  will  appear 
that  the  alleged  working  capital  was   provided  largely  by  the 


4i6  TRUSTS,    POOLS   AND   CORPORATIONS 

Union  Iron  Works,  with  slight  help  from  the  Hyde  Windlass 
Company  and  the  Eastern  Shipbuilding  Company. 

The  amount  of  Accounts  Payable  and  Notes  Payable  of  the 
different  companies  at  the  time  of  their  purchase  by  the  United 
States  Shipbuilding  Company  was  $2,334,987.64.  Of  this  amount 
1^2,192,145.98  was  owing  by  the  subsidiary  shipbuilding  com- 
panies other  than  the  Union  Iron  Works,  as  appears  from  said 
"  Schedule  No.  7."  As  the  principal  part  of  the  alleged  work- 
ing capital  above  mentioned  was  confined  to  Union  Iron  Works, 
it  will  appear  that  so  far  as  the  remaining  companies  are  con- 
cerned, when  taken  over  by  the  United  States  Shipbuilding  Com- 
pany, they  not  only  had  no  working  capital,  taken  collectively, 
but  were  in  immediate  need  of  financial  assistance. 

From  the  foregoing  facts,  viewed  not  only  in  the  light  of  sub- 
sequent developments,  but  also  from  the  figures  obtainable  at 
the  time  of  the  incorporation  of  the  United  States  Shipbuilding 
Company,  it  appears  to  have  been  the  intention  of  those  respon- 
sible for  the  statements  and  figures  alleged  to  have  been  relied 
upon  to  mislead  and  deceive  the  investing  public  and  the  then 
present  and  future  creditors  of  the  Company. 

Prospectus 

In  this  connection,  your  Receiver  begs  to  refer  to  the  pro- 
spectus issued  to  the  public,  with  a  view  to  inducing  subscriptions 
for  the  bonds  of  the  United  States  Shipbuilding  Company,  under 
date  of  June  14,  1902.  This  prospectus  seeks  to  invite  the  pub- 
lic to  subscribe  for  nine  millions  of  dollars  of  the  first  mortgage 
5  per  cent  sinking  fund  gold  bonds  of  the  United  States  Ship- 
building Company.  It  recites  that  the  United  States  Shipbuild- 
ing Company  "  has  been  organized  under  the  laws  of  the  State 
of  New  Jersey."  It  implies  that  the  total  capital  stock  of  the 
Company  is  twenty  millions  of  dollars,  $10,000,000  of  which  is 
preferred  and  $10,000,000  common.  It  sets  out  a  list  of  the 
directors  of  the  United  States  Shipbuilding  Company,  number- 
ing ten  in  all.  It  recites  that  the  subsidiary  plants  of  the  Com- 
pany, exclusive  of  the  Bethlehem  Steel  Company,  have  been 
appraised  as  going  concerns  at  twenty  millions  of  dollars  ;  that 


UNITED   STATES   SHIPBUILDING    COMPANY         417 

these  companies  would  have  a  combined  working  ca|w4al  of  more 
than  five  milUon  of  dollars ;  that  they  have  on  hand  contracts 
for  work  amounting  to  more  than  $36,000,000,  on  which  the 
profits  were  estimated  at  over  $5,000,000. 

Waiving  for  the  present  all  discussion  as  to  the  value  of  the 
plants  as  going  concerns,  a  comparison  of  this  prospectus  with 
the  facts  disclose  the  following  false  and  misleading  statements : 

1.  At  the  date  of  this  prospectus  the  United  States  Ship- 
building Company  had  not  been  incorporated. 

2.  Its  capital  stock  was  never  Twenty  Millions.  Originally 
it  was  Three  Thousand  Dollars  ;  which  amount  was  subsequently 
increased  to  Forty-five  Millions. 

3.  Six  of  the  ten  persons  mentioned  as  directors  in  the  pro- 
spectus were  not  directors  of  the  company,  and  never  have  been. 

4.  The  amount  of  contracts  on  hand  did  not  exceed  $36,000,000, 
their  face  value  being  $34,182,861.94,  but  of  this  amount  a  profit 
was  available  only  on  the  uncompleted  portion  of  the  contracts, 
which  profit,  as  heretofore  shown,  will  not  exceed  $1,078,261.42, 
and  will  take  three  years  to  earn. 

5.  These  companies  did  not  have  a  working  capital  of  more 
than  $5,000,000;  the  figures  of  the  accountants  show  only  a 
working  capital  of  $3,278,798.48.  This  working  capital,  how- 
ever, was  almost  obliterated  by  subsequent  adjustment,  as  here- 
inbefore set  forth. 

6.  The  statement  that  the  profits  on  contract  work  in  hand 
would  be  $5,000,000  was  undeniably  false.  If  it  is  claimed  that 
the  profit  was  estimated  on  the  entire  amount  of  $36,000,000, 
the  answer  to  this  is  that,  admitting  there  was  $36,000,000  worth 
of  contracts  (which  was  not  true),  the  utmost  profit  that  could 
be  looked  for,  according  to  the  figures  of  the  accountants, 
was  $3,600,000.  When  this  prospectus  was  issued,  the  per- 
sons who  were  responsible  for  it  must  have  deliberately  dis- 
regarded figures  which  would  have  shown  that  the  amount  of 
work  still  to  be  done  on  the  contracts  was  but  $20,605,639.74, 
instead  of  $36,000,000,  and  that  upon  such  uncompleted  work 
a  liberal  estimate  would  have  placed  the  earnings  at  only  a 
trifle  over  $2,000,000. 


4i8  TRUSTS,    POOLS   AND    CORPORATIONS 

Value  of  the  Plants 

The  net  surplus  of  the  various  constituent  companies,  includ- 
ing their  plants,  according  to  the  statement  of  the  accountants, 
as  shown  by  the  books  of  said  companies,  were  on  the  31st  day 
of  July,  1902,  as  follows  : 

Bath  Iron  Works $827,316.19 

Hyde  Windlass  Co 358,121.29 

Crescent  Shipyard  Co 470,583.99 

Samuel  L.  Moore  &  Sons'  Co.          ....  404,788.88 

Eastern  Shipbuilding  Co 237,278.53 

Harlan  &  Hollingsworth  Co 1,294,767.16 

Union  Iron  Works 4.303.37^-97 

Total $7,896,235.01 

Bethlehem  Steel  Co.  (deducting  underlying  mortgages)  4,245,281.25 

Canda  Manufacturing  Co.  (estimated)     .         .         .  300,000.00 

Total $12,441,516.26 

For  this  property  the  directors  of  the  United  States  Ship- 
building Company  parted  with  the  following  obligations  of  that 
company : 


Preferred  stock  of  the  U.  S.  S.  Co. 
Common  stock  of  the  U.  S.  S.  Co. 
First  mortgage  5  per  cent  bonds 
Twenty-year  gold  bonds . 

Total         .... 


$19,998,500 
24,998,500 
16,000,000 
10,000,000 


70,997,000.00 


There  was  returned  to  the  company,  however, 
the  following  cash  and  securities : 

Cash $1,500,000 

First  mortgage  bonds 1,500,000 

Total $3,000,000.00 

Total  bonds  and  stock  paid  by  Shipbuilding  com- 
pany's directors  for  the  subsidiary  plants    .         .  $67,997,000.00 

In  connection  with  the  purchase  of  the  Canda  Manufacturing 
Company,  $1,100,000  of  the  cash  and  securities  of  the  United 
States  Shipbuilding  Company  were  parted  with.  The  Canda 
company  gave  up  nothing  except  its  lands  and  buildings,  its 
good  will,  if  any,  and  practically  all  of  its  machinery  being  re- 
tained by  the  vendors.  The  above  estimated  value  of  $300,000 
is  undoubtedly  greatly  in  excess  of  its  true  value.     No  use  has 


UNITED   STATES   SHIPBUILDING    COMPANY         419 

ever  been  made  of  this  plant,  and  none  was  apparently  contem- 
plated when  it  was  purchased.  After  its  purchase  the  directors 
of  the  United  States  Shipbuilding  Company  caused  an  inquiry  to 
be  made  with  a  view  to  ascertaining  whether  it  could  be  jnit  to  any 
use,  and  an  adverse  report  was  made.  (See  minutes  of  the  direct- 
ors.)    Why  this  property  was  purchased  at  all  is  not  apparent. 

Viewing  the  acquisition  of  the  properties  from  the  standpoint 
of  the  surplus  and  plant  values,  as  disclosed  by  the  books  of  the 
companies,  the  directors  appear  to  have  made  a  gift  of  upwards 
of  $55,000,000  worth  of  stock  and  bonds  of  the  United  States 
Shipbuilding  Company  entrusted  to  their  care. 

It  may  be  claimed,  however,  that  the  book  values  give  no  adequate 
idea  of  the  real  value  of  the  plants  as  going  concerns,  and  that 
the  earnings  of  the   plants  should   be   taken    into  account    in 
ascertaining   such  value.     With    reference   to   this   matter,  the 
minutes  of  the  directors  recite  that   the  constituent  companies, 
exclusive  of  the    Bethlehem    Steel   Company,   had   an    earning 
capacity  annually  of    ........         .     $2,225,000.00 

and  that  the  Bethlehem  Steel  Company  was  earning    .         .         .       1,800,000.00 

Making  a  total  earning  capacity  of $4,025,000.00 

This  statement  was  false,  and  must  have  been  known  to  be 
so  at  the  time  the  plants  above  mentioned  were  taken  over.  It 
can  serve  no  useful  purpose,  therefore,  in  establishing  value 
from  the  standpoint  of  earning  capacity.  In  this  connection 
the  earnings  of  the  past  year  are  presented  for  consideration  : 

The  earnings  of  all  the  companies  for  the  year  ending  July 
31st,  1903,  were  as  follows  : 

Constituent  companies         .........        $833,458.74 

Bethlehem  Steel  Company  (net  earnings)  after  deducting  interest  on 

underlying  mortgages,  discounts,  and  depreciation       .         .         .       1,662,530.80 

Total $2,495,989.54 

A  word  of  explanation  with  reference  to  the  earnings  of  the 
subsidiary  shipbuilding  companies.  These  earnings,  as  to  con- 
tinuing contracts,  are  arrived  at  as  follows  :  An  estimate  is  made 
of  the  proportion  of  the  contract  completed.  If  this  proportion 
should  represent  50  per  cent  of  the  entire  contract,  and  the  actual 
cost  of  such  percentage  should  be  found  to  be  10  per  cent  less 
than  the  proportion  of  the  entire  contract  price  then  earned,  the 
profit,  when  such  estimate  is  made,  is  put  down  at  a  figure  which 


420  TRUSTS,    POOLS   AND    CORPORATIONS 

will  represent  lo  per  cent  of  such  earned  proportion  of  the  con- 
tract price.  Frequently  this  method  of  arriving  at  profits  is 
found  to  be  erroneous.  The  percentage  of  completion  is  found 
to  have  been  placed  too  high,  and  as  a  consequence,  the  profits 
on  the  entire  contract  are  reduced  much  below  the  estimate, 
and,  in  many  cases,  entirely  wiped  out  and  a  loss  sustained. 

With  reference  to  the  Bethlehem  Steel  Company,  a  different 
method  prevails.  The  method  of  the  latter  company  is  to  take 
profits  only  upon  deliveries,  and  not  to  estimate  earnings  as  the 
work  progresses.  By  this  method  the  actual  profits  may  be 
arrived  at. 

Assuming,  however,  that  the  earnings  of  the  constituent  com- 
panies are  correctly  set  forth  above  (and  in  the  case  of  Bethle- 
hem they  are  not  understated),  of  what  use  are  such  earnings 
for  the  purpose  of  establishing  values  unless  they  are  available 
by  the  United  States  Shipbuilding  Company .-' 

These  companies  claim  to  have  earned  $2,495,989.54,  but  the 
United  States  Shipbuilding  Company  has  been  benefited  to  the 
extent  only  of  a  trifle  over  twelve  per  cent  of  this  amount.  Of  these 
alleged  earnings  the  constituent  companies  have  paid  during  the 
eleven  months  ending  July  i,  1903,  to  the  United  States  Ship- 
building Company ^60,754.23 

The   Bethlehem    Steel  Company,   for  the   purpose   of  meeting   the 

semi-annual  interest  on  the  $10,000,000  mortgage       .         .         .  250,000.00 

Making  a  total  of $310,754.23 

Of  the  $833,458.74  alleged  to  have  been  earned  by  the  Shipbuilding 

companies,  there  has  been  expended  for  new  machinery      .         .         $165,066.38 

Of  the   earnings   of   Bethlehem    company   there   was    expended   for 

plant  betterment 683,370.24 

There  was  paid  by  all  of  the  companies  to  the  United  States  Ship- 
building Company,  as  above  stated 310,754.23 

Making  a  total  of $1,159,190.85 

The  balance  of  the  earnings  (considering  the  above  amount 
as  having  been  earned)  amounting  to  the  sum  of  $1,336,798.69, 
was  retained  by  the  companies.  By  reason  of  the  unsafe  method 
of  ascertaining  the  profits  of  the  shipbuilding  companies,  it  is  ex- 
tremely doubtful  whether  they  have  earned  any  such  amount  as 
above  set  forth.  It  is  true,  however,  assuming  that  their  earnings 
have  been  as  above  mentioned,  that  their  financial  condition  has 
not  been  such  as  to  warrant  them  in  withdrawing  any  consider- 


UNITED    STATES   SHIPBUILDING    COMPANY  421 

able  sum  from  their  assets  for  payment  to  the  United  States 
Shipbuilding  Company.  The  utmost  that  they  Gouts' do  during 
the  past  year  was  a  trifle  over  s'even  per  cent  of  the  amount  claimed 
by  them  to  have  been  earned.  The  Bethlehem  company,  during 
the  past  year,  insisted  that  no  sum  in  excess  of  the  $250,000 
paid  by  them  to  meet  the  interest  on  the  $10,000,000  instrument, 
known  as  the  Schwab  mortgage,  could  be  withdrawn  from  their 
assets  for  payment  to  the  United  States  Shipbuilding  Company  ; 
or,  in  other  words,  that  about  fifteen  per  cent  of  their  entire  earn- 
ings was  the  best  they  could  do  for  the  United  States  Shipbuilding 
Company.  Concerning  the  earnings  of  the  Bethlehem,  your 
Receiver  will  deal  at  length  elsewhere  in  this  report,  but  it  may 
be  said  here  that  Bethlehem  deliberately  used  up  its  earnings  in 
making  enormous  purchases  of  material  for  its  own  benefit,  and 
in  extensions,  improvements,  and  repairs,  in  order  apparently  to 
keep  its  earnings  from  the  United  States  Shipbuilding  Company. 
On  the  basis  of  what  the  United  States  Shipbuilding  Company 
received  from  all  the  companies  last  year,  there  would  be  suffi- 
cient income  only  to  meet  the  interest,  at  five  per  cent,  on  an 
investment  of  a  trifle  over  $6,000,000.  It  may  be  insisted  that 
this  is  not  the  best  the  companies  can  do,  and  therefore  this 
amount  should  not  be  taken  as  a  guide  in  establishing  the  value 
of  the  plants.  Your  Receiver  is  satisfied  that  it  is  not  the  best  the 
companies  can  do,  especially  in  the  case  of  Bethlehem.  It  is 
certain  that  better  returns  would  have  been  received  from  the 
constituent  companies  if  they  had  been  brought  within  closer 
reach  of  the  central  company,  and  if  officers  had  been  placed 
in  charge  who  had  looked  to  the  interests  of  the  central  organi- 
zation and  not  wholly  to  the  betterment  of  the  constituent  com- 
panies. It  is  undoubtedly  true  that  the  fastening  upon  the 
constituent  companies  of  certain  officials,  at  fixed  salaries,  and 
for  a  long  term  of  years,  practically  beyond  the  reach  of  the 
central  organization,  has  materially  prevented  the  United  States 
Shipbuilding  Company  from  obtaining  the  best  results  from  its 
properties.  In  the  case  of  the  Bethlehem,  a  Board  of  Directors 
having  the  welfare  of  the  United  States  Shipbuilding  Company 
at  heart,  rather  than  its  destruction,  would  have  conduced  much 
to  the  gain  of  the  latter  company.     With  these  defects  in  man- 


422  TRUSTS,    POOLS   AND    CORPORATIONS 

agement  removed,  the  earning  capacity  of  all  the  companies,  so 
far  as  the  United  States  Shipbuilding  Company  is  concerned, 
would  be  greatly  enhanced. 

At  the  end  of  eleven  months  of  operation,  the  United  States 
Shipbuilding  Company  was  adjudged  insolvent  and  a  receiver 
appointed.  This  was  due  either  to  the  fact  that  the  earnings 
were  insufficient  to  meet  its  obligations,  or  because  those  earnings 
were  improperly  diverted.  Your  Receiver  will  hereinafter  dis- 
cuss this  matter,  but  under  this  head  he  respectfully  submits 
that  the  earnings  of  the  several  companies  during  the  past  year 
may  not  safely  be  used  for  the  purpose  of  establishing  the  value 
of  the  plants. 

Excessive  Price  paid  for  Plants 

Considering  the  value  of  the  plants,  therefore,  either  from  the 
standpoint  of  the  books,  or  the  earning  capacity  of  the  compa- 
nies, and  allowing  for  an  increase  in  earnings  in  the  future,  it  is 
evident  that  the  accommodating  directors  of  the  United  States 
Shipbuilding  Company,  in  acquiring  these  properties,  deliberately 
>gave  away  many  million  dollars  in  the  stock  and  bonds  of  their 
Company. 

Who  participated  in  this  wholesale  plunder  ?  The  testimony 
now  being  taken  in  the  above  entitled  proceedings  will  doubtless 
disclose  the  name  of  all  the  participants ;  but  as  such  testimony 
will  be  submitted  to  this  Court  for  action,  your  Receiver  does 
not  deem  it  proper  to  comment  upon  it  here.  Certain  it  is  that 
much  of  this  vast  amount  of  stock  and  bonds  was  taken  by  per- 
sons and  corporations  who  parted  with  little  or  no  consideration 
in  exchange  therefor.  Blocks  of  the  stock  went  to  the  vendors  of 
the  constituent  plants  and  to  the  purchasers  of  bonds,  as  bonus, 
absolutely  without  benefit  to  the  Company ;  $20,000,000  of  it 
admittedly  went  to  Mr.  Charles  M.  Schwab  in  addition  to  the 
agreed  price  for  Bethlehem.  Some  of  it  went  to  the  promoters 
of  this  artistic  swindle;  and  when  all  had  been  provided  for, 
what  was  left  of  the  bonds,  amounting  to  $1,500,000,  'was 
handed  back  to  the  Company  ostensibly  to  supply  it  with 
"working  capital." 


UNITED   STATES   SHIPBUILDING   COMPANY  423 

From  the  foregoing  statement  as  to  values,  it  is  apparent  that 
the  $24,500,000  of  bonds  given  up  by  the  directors  was  an 
excessive  price  for  all  the  plants  purchased.  Your  Receiver 
is  advised  that  as  to  the  $44,997,000  of  the  preferred  and  com- 
mon stock  handed  over  by  the  directors  to  the  vendors  and 
promoters  of  this  scheme,  it  cannot  successfully  be  maintained 
that  any  value  was  paid  therefor.  Treating  the  issue  of  bonds, 
therefore,  as  full  payment  for  the  properties  (and  in  so  doing  the 
Shipbuilding  company  alone  is  being  injured),  it  follows  that  the 
vendors  and  promoters  and  their  associates  in  the  transfer  and 
conveyance  of  the  various  plants  to  the  United  States  Ship- 
building Company,  by  the  acceptance  of  this  $44,997,000  of  the 
capital  stock  of  the  Shipbuilding  company,  without  paying  value 
therefor,  became  liable  thereon  to  said  corporation,  by  virtue  of 
the  provisions  of  section  21  of  an  act  of  the  Legislature  of  the 
State  of  New  Jersey,  entitled  an  act  concerning  corporations 
(Revision  of  1896).  The  United  States  Shipbuilding  Company 
was  entitled  to  recover  such  indebtedness  from  the  holders  of 
such  stock  and  your  Receiver  is  advised  that  he  is  entitled  to 
enforce  the  same.  Accordingly,  your  Receiver  has  offset  against 
the  sum  alleged  to  be  due  on  the  $10,000,000  mortgage  to  the 
New  York  Security  and  Trust  Company  as  trustee,  to  protect 
the  issue  of  bonds  to  Charles  M.  Schwab,  the  Hability  of  the 
said  Charles  M.  Schwab  on  the  $20,000,000  of  stock  received 
by  him  as  aforesaid,  and  has  interposed  an  answer  in  the  suit 
by  said  trustee  to  foreclose  the  mortgage  given  as  security  for 
said  bonds,  claiming  that  by  virtue  of  said  offset  the  total  issue 
of  said  bonds  has  been  fully  paid  and  satisfied.  As  to  the  issue 
of  the  bonds  under  the  mortgage  for  $16,000,000  made  to  the 
Mercantile  Trust  Company,  your  Receiver  charges  that  many  of 
said  bonds  were  received  by  the  vendors  and  promoters  and 
their  transferees,  and  were  issued  by  said  Mercantile  Trust  Com- 
pany, with  full  knowledge  of  the  right  of  the  United  States 
Shipbuilding  Company  to  be  paid  for  the  common  and  preferred 
stock  taken  by  said  vendors  and  other  holders  of  said  bonds 
without  value,  and  as  to  all  bonds  secured  by  said  mortgage  so 
received,  your  Receiver  has  offset  against  the  amount  alleged  to 
be  due  thereon,  the  liability  of  the  holders  thereof  on  the  com- 


424  TRUSTS,    POOLS   AND    CORPORATIONS 

mon  and  preferred  stock  so  received  by  them,  or  their  trans- 
ferrers, and  has  interposed  an  answer  in  the  suit  instituted  by 
the  Mercantile  Trust  Company  to  foreclose  said  mortgage,  claim- 
ing that  by  virtue  of  such  offset  the  total  issue  of  said  bonds,  or 
the  principal  part  thereof,  has  been  fully  paid  and  satisfied. 

Culpability  of  the  United  States  Shipbuilding 
Company's  Directors  and  Others 

Your  Receiver  has  spoken  of  the  directors  of  the  United  States 
Shipbuilding  Company  as  if  they  were  wholly  responsible  for 
parting  with  many  million  dollars  in  the  stocks  and  bonds  of 
the  United  States  Shipbuilding  Company  without  value.  The 
directors  who  were  guilty  of  this  act  are  responsible  and  should 
be  held  accountable  for  their  unlawful  act;  but  they  are  not 
alone  responsible.  In  the  first  place,  they  were  not  bona-fide 
holders  of  the  stock  of  the  United  States  Shipbuilding  Company. 
They  were  clerks  selected  by  the  promoters  of  this  scheme  from 
the  Corporation  Trust  Company.  They  took  an  assignment  of 
a  subscriptive  right  to  a  share  of  stock,  and  upon  the  strength 
of  this  alleged  subscription  they  dealt  with  the  property  of  the 
United  States  Shipbuilding  Company  in  the  manner  above  re- 
cited. These  young  men  were  mere  figureheads,  placed  in  this 
position  in  order  that  the  scheme  of  others  might  be  carried  into 
effect.  This  scheme  was  placed  before  them  by  its  instigators, 
through  the  medium  of  an  alleged  offer  of  John  \V.  Young,  and 
the  so-called  directors  in  conformity  with  their  instructions,  and, 
without  the  ability  or  the  knowledge  to  pass  upon  the  matters 
therein  contained,  proceeded  to  do  as  they  were  told.  Your 
Receiver  charges  that  the  properties  of  the  various  constituent 
companies  were  sold  to  the  United  States  Shipbuilding  Company 
for  an  amount  which  the  vendors  of  such  properties,  at  the  time 
of  such  sale,  knew  to  be  far  in  excess  of  the  fair  value  of  said 
plants ;  and  that  the  plan  to  combine  such  properties  was  con- 
ceived by  certain  promoters  and  was  consummated  by  them  with 
full  knowledge  of  its  injustice  to  the  United  States  Shipbuilding 
Company. 

Your  Receiver  begs  to  direct  the  attention  of  the  Court  to  the 


UNITED    STATES   SHIPBUILDING   COMPANY  425 

fact  that  in  the  purchase  of  the  various  constituent.j:ompanies, 
the  United  States  Shipbuilding  Company  was  absolutely  without 
independent  and  intelligent  representation.  No  inspection  of 
the  properties  was  made  on  behalf  of  the  Shipbuilding  company. 
No  independent  appraisement  was  had.  No  steps  seem  to  have 
been  taken  by  any  one  with  a  view  to  protecting  the  interests  of 
the  United  States  Shipbuilding  Company.  The  directors  who 
purported  to  act  for  the  Company  were  the  tools  of  the  pro- 
moters ;  the  debts  of  the  constituent  companies,  aggregating 
$2,334,987.64,  seem  to  have  been  purposely  withheld,  and  the 
bonds  and  stock  of  the  United  States  Shipbuilding  Company 
were  placed  wholly  at  the  mercy  of  the  vendors  and  promoters. 

Operation  of  the  United  States  Shipbuilding  Company 

Under  such  auspices  the  United  States  Shipbuilding  Company 
began  operations.  On  paper  the  constituent  companies  had  a 
working  capital  in  excess  of  $3,000,000,  yet  offices  had  hardly 
been  secured  by  the  United  States  Shipbuilding  Company  before 
the  latter  company  was  compelled  to  assist  the  constituent  com- 
panies to  pay  their  debts.  The  alleged  working  capital  of  the 
constituent  companies  existed  on  paper  only.  It  was  made  to  ap- 
pear as  available  capital  in  order  that  the  sale  might  be  consum- 
mated. After  such  sale  there  was  no  longer  any  necessity  for 
the  continuance  of  this  pretence,  and  accordingly  demands  for 
remittances  began  to  pour  into  the  central  organization.  During 
the  eleven  months  ending  July  i,  1903,  the  United  States  Ship- 
building Company  was  compelled  to  advance  to  the  constituent 
companies  the  sum  of  $1,019,955.78.  Of  this  amount  $60,754.23 
was  returned  to  the  Company,  making  the  net  amount  advanced 
to  the  constituent  companies  $959,201.55.  In  addition  to  this 
sum  it  was  compelled  to  part  with  $520,000  of  the  bonds  which 
had  been  placed  with  it  as  working  capital,  for  the  purpose  of 
securing  indorsements  on  promissory  notes  which  the  United 
States  Shipbuilding  Company  was  required  to  make  for  the 
accommodation  of  the  constituent  companies. 

The  reason  for  this  has  been  herein  elsewhere  suggested. 
When  the  various  properties  were  purchased,  the  debts  of  such 


426  TRUSTS,    POOLS   AND    CORPORATIONS 

companies  were  not  disclosed.  Had  there  been  independent, 
intelligent  representation  on  the  part  of  the  United  States  Ship- 
building Company  in  connection  with  the  acquisition  of  these 
properties,  it  would  have  been  discovered  that  the  new  com- 
pany was  taking  over  ^2,334,987.64  of  debts,  a  considerable  part 
of  which  called  for  immediate  attention.  Had  there  been  such 
representation,  it  would  have  been  disclosed  that  the  companies 
had  practically  no  working  capital  except  such  as  they  might 
receive  from  their  vendee,  and  with  this  knowledge  the  whole- 
sale delivery  of  bonds  and  stocks  of  the  United  States  Ship- 
building Company  would  undoubtedly  have  been  averted.  But 
there  was  no  one  in  that  transaction  to  protect  the  interest  of 
the  new  company,  and  as  a  consequence  it  was  not  only  made 
to  pay  excessive  prices  for  the  property  purchased,  but  obliga- 
tions were  assumed  by  reason  of  this  vast  amount  of  debt  that 
practically  exhausted  the  resources  of  its  treasury. 

While  the  bills  of  sale  from  the  various  constituent  companies 
purported  to  transfer  all  the  personal  property  of  such  com- 
panies to  the  United  States  Shipbuilding  Company,  including 
their  cash,  amounting  to  the  sum  of  $389,317.57  (exclusive  of 
Bethlehem),  this  amount  was  retained  by  the  various  companies 
when  the  leases  above  mentioned  were  made,  and  no  benefit 
therefrom  was  ever  received  by  the  United  States  Shipbuilding 
Company,  except  the  doubtful  one  of  allowing  this  amount  to 
help  swell  the  alleged  working  capital  of  the  constituent  com- 
panies. 

The  United  States  Shipbuilding  Company  was  not  fairly 
organized  until  some  time  in  September,  1902.  On  the  24th 
day  of  December,  1902,  with  a  view  to  inducing  the  New  York 
Stock  Exchange  to  list  the  entire  stock  and  bond  issue  of  the 
Company,  amounting  to  $69,500,000,  a  statement  was  made  to 
such  exchange,  over  the  signature  of  A.  C.  Gary,  treasurer  of 
the  United  States  Shipbuilding  Company.  This  statement  re- 
cites that  the  earnings  of  the  subsidiary  companies,  exclusive  of 
the  Bethlehem  Steel  Company,  for  the  year  ending  June  30, 
1902,  amounted  to  the  sum  of  $1,942,522.03,  and  that  the  net 
earnings  of  the  Bethlehem  Steel  Company  for  twelve  months 
ending  July  31,    1902,  amounted  to  the  sum  of  $1,441,208.03. 


UNITED   STATES   SHIPBUILDING   COMPANY          427 

Without  taking  time  to  controvert  this  statement.^which  was 
clearly  erroneous,  and  which,  upon  a  proper  examination,  would 
have  been  shown  to  be  so,  an  allegation  appears  in  this  statement 
of  far  more  serious  import.  It  is  therein  alleged  that  the  net 
earnings  of  the  United  States  Shipbuilding  Company  and  the 
Bethlehem  Steel  Company  for  the  three  months  ending  Novem- 
ber 30,  1902,  amounted  to  the  sum  of  $1,163,022.22.  Of  this 
amount  the  United  States  Shipbuilding  Company  was  said  to 
have  earned  up  to  that  time  $$  54,02 1.45,  and  the  portion  earned  by 
the  Bethlehem  Steel  Company  was  placed  at  $609,000.77.  These 
earnings  were  said  to  be  net ;  but  in  the  case  of  the  Bethlehem 
Steel  Company  no  allowance  was  made  therein  for  depreciation, 
and,  furthermore,  such  earnings  constituted  no  basis  for  averag- 
ing the  annual  profit,  as  the  later  report  of  the  Bethlehem  Steel 
Company  shows.  In  the  case  of  the  United  States  Shipbuilding 
Company,  the  earnings  existed  on  paper  only,  as  appears  from 
subsequent  reports.  Your  Receiver  believes  that  the  officials  of 
the  United  States.  Shipbuilding  Company  did  not  know  that 
erroneous  reports  were  being  made  to  them  by  the  constituent 
companies,  but  their  action  was  at  least  injudicious  in  so  wording 
the  statement  to  the  Stock  Exchange  as  to  impel  the  inference  that 
the  earnings  of  the  United  States  Shipbuilding  Companyup  to  the 
30th  day  of  November,  1902,  were  available  for  the  purpose  of 
meeting  the  accrued  interest  and  sinking  fund  payment  on  all 
bonds  of  the  company  for  that  quarter,  for  during  the  very  time 
within  which  the  alleged  earnings  of  $554,021.45  had  been  made 
by  the  subsidiary  companies,  and  which  the  statement  infers 
were  available  for  the  payment  of  all  accrued  interest  and  sink- 
ing fund  charges,  they  had  been  compelled  to  advance  in  cash 
to  the  constituent  companies  the  sum  of  $424,467.59. 

On  this  showing  the  application  to  list  the  securities  was  granted 
by  the  New  York  Stock  Exchange  on  January  14th,  1903.  A 
little  over  four  months  later,  on  the  25th  day  of  May,  1903,  a 
statement  was  issued  to  the  public  embodying  a  plan  for  the 
reorganization  of  the  United  States  Shipbuilding  Company  upon 
a  basis  that  would  enable  it  to  exist.  This  proposed  plan  of 
reorganization  stated  that  "by  reason  of  the  excessive  mortgage 
obligations  of    the  United    States    Shipbuilding  Company,   its 


428  TRUSTS,    POOLS   AND    CORPORATIONS 

borrowing  capacity  and  credit  has  become  so  seriously  affected 
that  outstanding  notes  are  being  pressed  for  payment  and  the 
making  of  further  loans  is  rendered  impossible,"  and  recom- 
mended that  the  Company  should  be  reorganized  upon  a  basis 
of  almost  40  per  cent  less  than  was  originally  considered  the 
fair  value  of  the  plants.  If  other  evidence  than  the  figures  above 
set  forth  be  needed  to  prove  that  vendors  and  promoters  of  this 
scheme  sought  to  secure  stocks  and  bonds  of  the  United  States 
Shipbuilding  Company  without  consideration,  it  is  supplied  by 
this  proposed  Plan  of  Reorganization,  which  practically  states 
that  the  Company  is  unable  to  pay  interest  on  a  greater  capital- 
ization and  bond  issue  than  $43,000,000,  an  amount  $1,487,000 
less  than  the  capital  of  the  United  States  Shipbuilditig  Company 
distributed  in  connection  with  the  purchase  of  the  properties,  to 
say  nothing  of  the  bond  issues  of  $24,500,000. 

Causes  of  Failure 

What  were  the  causes  of  failure  of  the  United  States  Ship- 
building Company  ?  One  of  such  causes  was  the  fact  that  the 
directors  parted  with  bonds  to  an  amount  upon  which  it  was 
impossible  to  meet  the  interest.  The  failure,  however,  was  pre- 
cipitated, if  not  directly  brought  about,  by  the  fact  that  in  the 
Bethlehem  transaction  the  United  States  Shipbuilding  Company 
officers  had  to  deal  with  people  who,  while  thoroughly  under- 
standing the  intricacies  of  "higher  finance,"  seemed  to  have 
overlooked  the  requirements  of  common  fairness.  In  speaking 
of  plant  values  elsewhere  in  this  report,  the  Bethlehem  property 
has  been  dealt  with  as  though  it  had  been  purchased  by  the 
United  States  Shipbuilding  Company,  but  an  examination  of  the 
transaction  will  show  that  it  was  otherwise.  While  the  agreed 
price  for  the  Bethlehem  company  was  $9,000,000,  to  be  paid  for 
by  an  issue  of  $10,000,000  of  bonds  at  90,  the  directors  of  the 
United  States  Shipbuilding  company,  upon  request,  handed  over 
to  Mr.  Charles  M.  Schwab  an  additional  amount  of  $20,000,000 
in  the  common  and  preferred  stock  of  the  United  States  Ship- 
building Company.  As  this  $20,000,000  of  stock  would  not  be 
sufficient  to  give  Mr.  Schwab  the  control  of  the  United  States 


UNITED    STATES   SHIPBUILDING    COMPANY         429 

Shipbuilding  Company,  there  was  inserted  in  the  mortgage  given 
to  secure  his  ^10,000,000  of  bonds,  a  provision  that  such  bonds 
should  have  a  voting  power  equal  to  ^10,000,000  of  stock.  As 
the  total  issue  of  stock  of  the  United  States  Shipbuilding  Com- 
pany was  but  $45,000,000,  the  $30,000,000  voting  power  thus 
given  to  Mr.  Schwab  was  sufificient  to  justify  him  in  saying  that 
he  did  not  sell  the  Bethlehem  Steel  Company,  but  took  over  the 
United  States  Shipbuilding  Company,  the  directors  of  that  Com- 
pany giving  him  $30,000,000  in  stock  and  bonds  for  taking  it 
off  their  hands. 

In  this  deal  Mr.  Schwab  parted  with  nothing.  In  the  sale  of 
the  other  constituent  companies,  the  real  and  personal  property, 
as  well  as  their  capital  stock,  were  transferred  to  the  United  States 
Shipbuilding  Company  by  the  necessary  deeds,  bills  of  sale,  and 
assignments.  But  in  the  case  of  Bethlehem,  Mr.  Schwab  per- 
mitted to  be  given  up  only  its  capital  stock,  and  this  he  did  in  such 
manner  as  to  place  it  beyond  the  control  of  the  Shipbuilding 
company.  If  interests  friendly  to  the  United  States  Shipbuild- 
ing Company  had  controlled  this  stock,  it  would  have  been  able 
to  reach  the  earnings  of  the  Bethlehem  Steel  Company  through  a 
friendly  Board  of  Directors;  but  in  the  $10,000,000  mortgage  it 
was  provided  that  the  Trustee  should  designate  three  of  such 
directors,  and  the  United  States  Shipbuilding  Company  should 
designate  four.  As  Mr.  Schwab  controlled  the  United  States 
Shipbuilding  Company,  by  reason  of  his  aforesaid  majority  of 
stock,  and  as  the  Trustee  was  of  his  own  selection,  the  United 
States  Shipbuilding  Company  was  absolutely  at  the  mercy  of  Mr. 
Schwab.  His  advisers,  however,  in  evident  fear  that  something 
had  been  overlooked,  caused  the  United  States  Shipbuilding 
Company  to  execute  a  contract  wherein  it  agreed  and  guaranteed 
that  so  long  as  any  part  of  the  $10,000,000  issue  of  bonds  above 
referred  to  should  be  outstanding  and  unpaid,  the  Bethlehem 
company  should  pay  dividends  on  its  entire  outstanding  capital 
stock  at  the  rate  of  not  less  than  six  per  cent  per  annum,  and  for 
the  purpose  of  making  such  payments  the  Shipbuilding  company 
agreed  that  the  Bethlehem  company  should  earn,  over  and  above 
its  operating  expenses  and  fixed  charges  (including  interest  on 
its  bonds  and  taxes),  and  over  and  above  the  working  capital  of 


430  TRUSTS,    POOLS   AND    CORPORATIONS 

$4,000,000  therein  provided  for,  a  sum  sufficient  to  make  such 
annual  dividend  disbursements ;  and,  in  the  event  of  the  failure 
of  the  Bethlehem  company  earning  sufficient  to  pay  such  divi- 
dend at  the  rate  of  six  per  cent,  then  the  United  States  Ship- 
building Company  was  to  pay  to  the  Bethlehem  company,  on 
demand,  a  sum  sufficient  to  make   such   annual  dividend  dis- 
bursements.    The  Shipbuilding  company  further  agreed  to  sup- 
ply the   Bethlehem   company  with   all   such   orders,    contracts, 
work  and  earning  capacity  as  should  be  necessary  to  enable  it 
to  earn  and  pay  the  annual  dividends  above  mentioned.     Was 
ever  such  another  agreement,  so   apparently  harmless,  yet  so 
ruinous,  conceived  by  the  mind  of   man  ?     On  its  face  it  was 
simply  an  agreement  to  the  effect  that  if  sufficient  earnings  were 
not  made  by  the  Bethlehem  to  pay  a  dividend  of  6  per  cent  on 
its  capital  stock,  the  United  States  Shipbuilding  Company  would 
advance  such  sum.     This  agreement  was  an  absurd  arrange- 
ment, in  view  of  the  fact  that  the  U  nited  States  Shipbuilding  Com- 
pany was  the  nominal  owner  of  this  stock,  and  as  such  was  entitled 
to  its  dividends;  nevertheless  the  United   States   Shipbuilding 
Company  was  made  to  agree  in  effect  that  if  it  wanted  dividends 
from  Bethlehem  it  should  contribute  the  means  to  enable  the  pay- 
ment of  such  dividends.     An  excuse  for  the  United  States  Ship- 
building Company  officials  entering  into  such  an  agreement  might 
be  found  in  the  supposition  that  they  may  have  believed  that  as 
they  had  the  right  to  designate  four  of  the  seven  directors  of  the 
Bethlehem  Steel  Company,  they  would  be  able  to  control  the 
earnings  of  that  company,  and  the  agreement  above  mentioned 
might  become  inoperative.      Such  a  belief,  however,  had  no  sub- 
stantial foundation,  for,  as  heretofore  stated,  the  control  both  of  the 
Bethlehem  and  the  United  States  Shipbuilding  Company  was 
vested  in  Mr.  Schwab.    Your  Receiver  will  not  attempt  to  advance 
any  reason  why  the  latter  thought  it  necessary  to  take  any  such 
agreement  in  view  of  the  fact  that  he  had  previously  thereto  ob- 
tained a  control  of  the  Shipbuilding  company  that  would  enable 
him  at  any  moment  to  throttle  it.     As  if  the  foregoing  provisions 
in  said  agreement  were  not  sufficient,  the  United  States  Shipbuild- 
ing Company  was  further  made  to  agree  that  in  the  event  that  the 
working  capital  of  the  Bethlehem  Steel  Company  should  at  any 


UNITED    STATES   SHIPBUILDING   COMPANY  431 

time  fall  below  $4,000,000,  the  United  States  ShipbiyXding  Com- 
pany would,  upon  demand,  make  up  such  sum  as  might  be  neces- 
sary to  bring  the  working  capital  up  to  that  figure.  The  agree- 
ment contains  other  provisions,  all  operating  against  the  United 
States  Shipbuilding  Company,  but  enough  has  been  referred  to  to 
show  that  in  signing  it  the  United  States  Shipbuilding  Company 
had  lost  all  chance  of  ever  reaching  the  earnings  of  the  Bethle- 
hem Steel  Company.  For,  assuming  that  Mr.  Schwab's  directors 
of  the  United  States  Shipbuilding  Company  should  demand  of 
Mr.  Schwab's  directors  of  the  Bethlehem  Steel  Company  that  a 
dividend  be  declared  from  the  earnings  of  the  latter  company, 
Mr.  Schwab's  directors  of  the  Bethlehem  Steel  Company  could 
always  reply  (as  they  did  when  demand  was  made)  that  it  was  not 
considered  wise  to  declare  a  dividend  at  that  time. 

In  April,  1903,  it  became  apparent  that  unless  funds  were 
advanced  by  the  Bethlehem  Steel  Company  for  the  purpose  of 
meeting  the  semi-annual  interest  on  the  first  mortgage  bonds 
due  July  ist,  a  default  in  the  payment  thereof  would  ensue. 
Notwithstanding  the  urgent  need  apparent  at  that  time  for 
retrenchment,  and  the  necessity  for  requiring  Bethlehem  to  set 
aside  some  of  its  large  earnings  for  the  purpose  of  meeting  the 
coming  interest,  the  Executive  Committee  of  the  United  States 
Shipbuilding  Company,  on  the  7th  day  of  April,  1903,  adopted  a 
resolution  approving  a  report  of  the  president  of  the  Bethlehem 
Steel  Company  with  reference  to  certain  improvements  and 
extensions  alleged  to  have  been  required  at  the  works  of  the 
latter  company,  showing  a  total  required  expenditure  of  $2,802,000 
(including  $365,000  previously  appropriated).  On  the  14th  day 
of  April,  1903,  the  directors  of  the  United  States  Shipbuilding 
Company  held  a  meeting,  at  which  time  it  was  sought  to  approve 
the  minutes  of  the  previous  meeting  of  the  Executive  Committee. 
On  a  motion  to  approve  such  minutes,  Mr.  Lewis  Nixon,  the 
president  of  the  company,  stated  that  he  desired  to  go  on  record 
concerning  the  resolution  passed,  to  the  effect  that  in  providing 
for  any  such  extensions  and  improvements  it  should  be  made 
a  condition  of  any  such  expenditure  that  proper  provision 
should  be  made  to  safeguard  the  amount  of  $900,000,  which 
must  be  declared  as  a  dividend  by  the  Bethlehem  company,  and 


432  TRUSTS,    POOLS   AND    CORPORATIONS 

suggested  that  provision  to  that  effect  be  added  to  the  authority 
asked  for.  Notwithstanding  this  request  of  Mr.  Nixon,  the 
minutes  of  the  Executive  Committee  were  approved  by  the 
directors. 

Your  Receiver  is  informed,  and  believes  it  to  be  true,  that 
thereafter  Mr.  Lewis  Nixon  repeatedly  sought  to  induce  the  direc- 
tors of  the  United  States  Shipbuilding  Company  to  cooperate 
with  him  in  compelHng  the  Bethlehem  company  to  pay  over 
some  of  its  earnings  for  the  purpose  of  staving  off  the  impending 
default  of  the  United  States  Shipbuilding  Company ;  but  from 
the  14th  day  of  April,  1903,  until  the  22d  day  of  June,  1903,  it 
was  impossible  to  obtain  a  quorum  either  of  the  Executive 
Committee  or  of  the  directors  of  the  United  States  Shipbuilding 
Company.  Again,  on  the  27th  of  June,  while  the  proceedings 
were  pending  in  this  court  for  the  appointment  of  a  Receiver, 
Mr.  Nixon  demanded  the  Bethlehem  Steel  Company's  assistance 
for  the  purpose  of  averting  the  impending  default,  through  the 
medium  of  the  following  letter : 

New  York,  June  27th,  1903 
E.  M.  McIlvain,  Esq., 

President  Bethlehem  Steel  Company, 
South  Bethlehem,  Pa. : 

Dear  Sir  —  The  Bethlehem  Steel  Company,  having  earned  during 
the  year  ending  August  ist,  1903,  over  and  above  its  operating  expenses 
and  fixed  charges  (including  interest  on  its  bonds  and  taxes),  and  with- 
out impairment  of  its  working  capital  of  $4,000,000,  a  sum  sufficient  to 
pay  a  dividend  of  6  per  cent  on  its  entire  present  outstanding  capital 
stock,  I  request  and  demand,  in  behalf  of  the  United  States  Shipbuild- 
ing Company,  as  owner  of  all  of  said  capital  stock,  that  your  company, 
on  or  before  June  30,  1903,  declare  a  dividend  in  an  amount  sufficient 
to  pay  a  bond  interest  of  $362,500,  due  July  ist,  1903,  and  pay  the  same 
as  required  by  the  terms  of  the  agreement  of  August  12th,  1902,  between 
your  company  and  the  United  States  Shipbuilding  Company,  and  credit 
this  upon  the  yearly  dividend  on  the  stock  of  the  Bethlehem  Steel  Com- 
pany, $250,000  of  which  has  already  been  declared  and  paid  in  a  simi- 
lar manner  to  meet  the  interest  on  the  twenty-year  bonds. 

Yours  truly, 
(Signed)  Lewis  Nixon, 

President 


UNITED    STATES   SHIPBUILDING   COMPANY         433 

No  attention  was  paid  to  this  demand,  and  the.^dcfault  fol- 
lowed. Had  the  efforts  of  Mr.  Nixon  been  successful,  the 
subsequent  adjudication  of  insolvency  and  the  appointment  of 
a  receiver  would  have  been  averted. 

Your  Receiver  considers  it  his  duty  to  bring  to  the  attention 
of  the  Court  the  fact  that  while  the  Bethlehem  company  was 
earning  upwards  of  ^2,000,000  annually,  these  earnings  were 
being  placed  beyond  the  reach  of  the  United  States  Shipbuild- 
ing Company  by  the  making  of  vast  extensions  and  improve- 
ments in  the  Bethlehem  company  and  the  purchasing  and 
ordering  of  enormous  quantities  of  merchandise,  with  the 
apparent  purpose  of  bringing  about  the  destruction  of  the 
United  States  Shipbuilding  Company. 

Further  proof  in  this  behalf  is  supplied  by  Mr.  E.  M.  Mcllvain, 
President  of  the  Bethlehem  Steel  Company,  in  his  letter  to  Mr. 
George  R.  Sheldon,  Chairman  of  the  Reorganization  Committee. 
In  this  letter,  dated  the  25th  of  May,  1903,  Mr.  Mcllvain  states 
that  during  the  fiscal  year  of  the  Bethlehem  Steel  Company 
ending  April  30th,  1903,  the  net  earnings  of  his  company  were 
$2,518,264.58.  In  the  third  paragraph  of  this  letter  he  states 
that  for  the  year  beginning  May  i,  1903,  a  conservative  estimate 
of  the  net  earnings  of  the  Bethlehem  Steel  Company  would  be 
about  $2,250,000  after  deducting  $517,550  of  earnings  for  the 
purpose  of  paying  interest  on  the  underlying  mortgages.  Of 
this  amount  of  earnings,  he  states,  in  the  fourth  paragraph  of 
his  letter,  that  he  feels  confident  that  there  could  be  withdrawn 
for  distribution  (for  dividends)  the  sum  of  $1,200,000.  During 
the  year  within  which  Mr.  Mcllvain  says  the  net  earnings  of  the 
Bethlehem  Steel  Company  were  $2,518,264.58,  the  utmost  that 
the  Bethlehem  Steel  Company  could  be  induced  to  give  up  to 
the  United  States  Shipbuilding  Company  was  $250,000.  But 
in  presenting  the  matter  to  the  public,  through  the  medium  of 
the  Reorganization  Committee,  and  with  a  view  to  inducing  the 
acceptance  of  a  plan  that  would  further  the  interests  of  Mr. 
Schwab,  he  states  that  from  the  earnings  which  are  not  in  excess 
of  the  fiscal  year  ending  April  30,  1903,  he  would  be  able  to 
withdraw  and  pay  over  to  the  reorganized  company  a  sum  almost 
five  times  as  much  as  his  company  was  able  to  do  when  there 


434  TRUSTS,    POOLS   AND    CORPORATIONS 

was  the  utmost  need  for  its  greatest  contribution.  Your  Re- 
ceiver is  unwilling  to  believe  that  Mr.  Mcllvain  would  deliber- 
ately make  a  false  statement  in  this  connection.  He  is  also 
willing  to  accept  his  statement  that  the  Bethlehem  company- 
would  be  able  to  withdraw  from  its  current  assets  the  sum  of 
;^  1,200,000  for  distribution  during  the  year  beginning  May  i, 
1903,  but  in  accepting  this  statement  and  considering  it  in  con- 
nection with  the  fact  that  all  Bethlehem  would  advance  during 
the  past  year  was  $250,000,  and  bearing  in  mind  that  the  major 
part  of  the  improvements  and  extensions  above  authorized  were 
to  be  completed  in  subsequent  years,  it  is  difficult  to  draw  any 
other  conclusion  than  that  the  earnings  of  Bethlehem  company 
during  the  past  year  were  deliberately  withheld  for  the  purpose 
of  wrecking  the  United  States  Shipbuilding  Company.  During 
the  year  ending  July  31,  1903,  Bethlehem  expended  for  addi- 
tions to  its  plant  the  sum  of  $683,370.24.  In  addition  to  this 
amount  it  expended  for  extraordinary  and  general  repairs,  dur- 
ing the  year  ending  April  30,  1903,  according  to  the  report  of 
Price,  Waterhouse  &  Co.,  the  sum  of  $450,000.  It  increased  its 
material  (unfinished  and  finished  product  and  stores)  $687, 149. 16. 
Its  notes  payable,  which  amounted  to  $350,000  when  the  stock 
of  this  company  was  attempted  to  be  purchased  by  the  United 
States  Shipbuilding  Company,  were  reduced  $200,000  up  to 
August  I,  1903,  and  have  since  been  entirely  wiped  out,  and 
finally  it  reduced  its  accounts  payable  to  the  extent  of  $179,468.22. 
Why  such  enormous  sums  should  be  expended  for  additions, 
repairs,  and  material  at  a  time  when  the  United  States  Ship- 
building Company  was  in  urgent  need  of  financial  aid  can  be 
reasonably  accounted  for  only  upon  the  theory  that  it  was  in 
conformity  with  a  deliberate  plan  to  provide  a  plausible  excuse 
for  having  withheld  all  dividends  when  the  crash  should  come 
in  the  affairs  of  the  United  States  Shipbuilding  Company.  Some 
attempt  has  been  made  by  Bethlehem  to  justify  its  retention 
of  its  earnings  by  the  statement  that  its  credit  had  become  im- 
paired, and  it  was  therefore  necessary  to  pay  cash  for  supplies, 
as  well  as  to  reduce  its  accounts  and  bills  payable  in  order  to 
placate  its  creditors.  The  alleged  cause  of  the  impairment  of 
credit  was  said  to  be  a  mortgage  for  $10,000,000  which  the 


UNITED    STATES   SHIPBUILDING   COMPANY         435 

Bethlehem  company  made  to  the  Colonial  Trust  Com^ny  upon 
its  plant  and  property  at  the  time  of  the  purchase  of  Bethlehem 
by  the  United  States  Shipbuilding  Company.  As  further  secur- 
ity to  Mr.  Schwab  for  the  $10,000,000  of  bonds  delivered  to  him 
as  the  purchase  price  of  Bethlehem,  the  Bethlehem  Steel  Com- 
pany executed  to  the  Colonial  Trust  Company  the  mortgage 
above  referred  to  to  secure  a  bond  in  the  hke  amount.  Your 
Receiver  is  advised  that  the  execution  and  delivery  of  such  bond 
and  mortgage  by  Bethlehem  to  secure  Mr.  Schwab  for  the 
purchase  price  of  the  sale  of  the  stock  of  the  Bethlehem  was  a 
fraud  upon  the  creditors  of  said  company,  and  was  otherwise 
void  because  of  the  control  of  the  directors  by  Mr.  Schwab.  In 
addition  thereto,  it  is  evident  that  the  impairment  of  credit,  if 
any,  which  Bethlehem  complains  of,  was  the  result  of  its  own 
deliberate,  unwarranted,  and  illegal  act.  Your  Receiver  sub- 
mits, therefore,  that  there  was  no  justification  for  withholding 
from  the  United  States  Shipbuilding  Company  the  entire  earn- 
ings of  the  Bethlehem  company,  and  charges  that  the  inability 
of  the  Shipbuilding  company  to  continue  its  business  was  due  in 
large  part  to  the  failure  of  the  Bethlehem  company  to  relinquish 
its  earnings. 

At  this  point  your  Receiver  desires  to  call  the  attention  of 
the  Court  to  another  matter  somewhat  small  in  comparison  with 
the  enormous  and  unlawful  appropriation  of  stocks  and  bonds 
of  the  United  States  Shipbuilding  Company  above  mentioned, 
but  of  some  importance  in  showing  the  manner  with  which  the 
Bethlehem  company  dealt  with  the  United  States  Shipbuilding 
Company.  At  the  time  of  the  sale  of  the  Bethlehem  Steel  Com- 
pany to  the  United  States  Shipbuilding  Company,  a  statement 
was  made  that  the  amount  of  inventory  was  a  certain  figure. 
After  the  sale  of  the  Bethlehem  company  to  the  United  States 
Shipbuilding  Company,  $250,000  of  this  amount  was  charged 
off  by  the  Bethlehem  company,  for  the  purpose  of  adjusting 
the  book  value  of  the  inventory  with  the  actual  value  which 
had  been  placed  thereon  by  the  accountants  after  examination. 
This  examination  had  been  made  in  April,  1902,  and  the  Bethle- 
hem company  had  been  instructed  at  that  time  to  charge  off, 
to  adjustment  of  inventory,  $609,541.95.     Instead  of  complying 


436  TRUSTS,   POOLS  AND   CORPORATIONS 

with  this  request,  they  charged  off  only  $359,541-95.  and  at  the 
time  of  the  sale  of  the  plant  to  the  United  States  Shipbuilding 
Company  the  statement  submitted  contained  a  surplus  $250,000 
in  excess  of  what  Bethlehem  knew  to  be  the  actual  amount. 

Still  another  matter  should  be  brought  to  the  attention  of  the 
Court.  On  the  22d  of  June,  1903,  while  proceedings  were 
pending  for  the  appointment  of  a  receiver  of  the  Shipbuilding 
company,  and,  as  it  seems  to  your  Receiver,  with  a  view  of 
forestalling  the  action  of  the  Court,  and  in  contempt  thereof, 
the  directors  of  said  Company  adopted  a  resolution,  as  provided 
for  under  Mr.  Schwab's  mortgage,  requesting  the  New  York 
Security  Trust  Company  to  vote  the  entire  shares  of  the  capital 
stock  of  the  Bethlehem  Steel  Company  in  favor  of  and  for  the 
following  persons,  as  directors  of  said  Bethlehem  Steel  Com- 
pany, namely,  E.  M.  Mcllvain,  Archibald  Johnson,  Adolphe  E. 
Borie,  and  Lewis  Nixon.  Mr.  Mcllvain  was  at  that  time  and  is 
now  the  President  of  the  Bethlehem  Steel  Company ;  Mr.  Borie 
was  and  is  the  Vice-President  of  the  Bethlehem  Steel  Company, 
and  Mr.  Johnson  v;as  and  is  the  General  Superintendent  of  said 
Company.  As  the  remaining  directors  were  selected  by  Mr. 
Schwab's  trustee,  it  is  apparent  that  but  one  of  the  seven  could 
be  said  to  represent  interests  other  than  those  of  Mr.  Schwab. 
By  this  means,  if  successful,  Mr.  Schwab  was  able  to  place  the 
control  of  Bethlehem  beyond  the  reach  of  the  Court  for  at  least 
another  year. 

Bethlehem  Steel  Company 

From  the  reports  submitted  by  the  officials  of  this  Company, 
it  is  evident  that  during  the  past  year  it  earned  far  more  money 
than  the  necessities  of  the  plant  required  to  be  retained  there. 
From  what  is  hereinabove  set  forth,  it  is  also  evident  that  so 
long  as  the  present  Board  of  Directors,  or  a  Board  subject  to 
present  influences,  shall  retain  ofifice,  no  benefit  shall  ever  be 
permitted  to  escape  to  the  Receivership.  Your  Receiver  is  con- 
vinced that  the  present  controlling  influence  at  this  plant  is 
wholly  hostile  to  the  Shipbuilding  company  and  its  representa- 
tives, and  your  Receiver  believes,  in  view  of  the  excessive  price 
paid  for  its  plant,  that  the  Shipbuilding  company,  or  its  repre- 


UNITED   STATES   SHIPBUILDING   COMPANY  437 

sentative,  should  be  permitted  to  have  at  least  somc^oice  in  its 
management.  At  present  this  is  denied,  but  your  Receiver  hopes^ 
that  such  action  may  be  taken  as  may  result  in  the  removal  of  the 
present  Board  of  Directors,  or  a  majority  of  them.  Your  Receiver 
believes  that  the  meeting  of  the  Board  of  Directors  of  the  United 
States  Shipbuilding  Company,  held  on  the  22d  day  of  June, 
1903,  and  hereinbefore  referred  to,  at  which  four  directors  were 
designated  to  represent  the  United  States  Shipbuilding  Company 
on  the  Board  of  the  Bethlehem  Steel  Company,  was  solely  for 
the  purpose  of  circumventing  any  order  of  this  Court  which 
might  be  made  in  the  proceedings  then  pending;  that  it  was 
intended  to  hinder  and  delay  the  creditors  of  the  United  States 
Shipbuilding  Company  and  to  place  this  property  beyond  their 
control  and  the  control  of  the  Receiver  to  be  appointed,  and  was 
otherwise  illegal  and  void.  Your  Receiver  believes  such  Board 
is  deliberately  furthering  a  course  at  once  illegal  and  greatly 
injurious  to  the  creditors  represented  by  your  Receiver,  and 
accordingly  he  makes  the  recommendation  concerning  this  Com- 
pany hereinafter  set  forth. 

Generally 

Since  the  appointment  of  your  Receiver  the  principal  ofifice 
has  been  engaged  in  legal  matters  rather  than  building  ships. 
Accordingly  your  Receiver  found  the  services  of  several  of  the 
officers  and  subordinates  of  the  Shipbuilding  com.pany  to  be 
unnecessary,  and  in  this  connection  has  reduced  expenses  up- 
wards of  $55,000  a  year. 

Recommendations 

Your  Receiver  respectfully  submits  the  following  recommenda- 
tions : 

1.  That  in  order  to  avoid  depreciation  by  disuse,  and  because 
of  the  existence  of  controversies  as  to  the  validity  of  the  encum- 
brances upon  the  premises,  the  Crescent  Shipyard  be  sold  free 
and  clear  of  all  such  encumbrances  as  soon  as  the  work  now  in 
contemplation  is  completed. 

2.  That  similar  action  be  taken  with  reference  to  the  plant 


438  TRUSTS,    POOLS   AND    CORPORATIONS 

of  the  Harlan  &  Hollingsworth  Company,  Wilmington,  Dela- 
ware. 

3.  That  as  soon  as  the  debts  of  the  company  shall  have  been 
ascertained  suit  be  instituted  against  all  persons  who  received 
the  stock  of  this  company  without  paying  full  value  therefor  to 
recover  from  them  such  an  amount  as  shall  be  necessary  to  pay 
said  debts  in  full,  under  section  21  of  an  act  of  the  Legislature 
of  the  State  of  New  Jersey,  entitled.  An  Act  concerning  Corpo- 
rations (Revision  of  1896). 

4.  That  suit  be  instituted  against  the  Bethlehem  Steel  Com- 
pany to  procure  the  appointment  of  a  Receiver  and  to  compel 
the  appropriation  of  the  earnings  of  that  company  by  way  of 
dividends  on  the  stock. 

Respectfully  submitted, 

James  Smith,  Jr., 

Receiver,  United  States  Shipbuilding  Company 

Dated  October  31,  1903. 

Certain  other  highly  disreputable  details  of  this  affair  were  concerned  with 
the  attempts  to  float  the  stock  in  Europe.  Much  of  the  correspondence,  show- 
ing connivance  with  notorious  parties  in  Paris,  was  published  in  the  New 
York  daily  papers  between  December  22.  1903.  and  the  first  of  January,  1904. 
Moody's  Truth  about  the  Trusts,  pp.  366-369,  gives  many  additional  details. 
A  paper  by  L.  W.  Sammis  of  the  New  York  Sun,  published  in  the  Annals  of 
the  American  Academy  of  Political  Science,  1904,  is  also  suggestive.  After 
protracted  controversy  and  litigation,  a  reorganization  plan  was  agreed  upon 
and  published  May  25,  1905  ;  and  a  new  company  was  formed  to  take  over 
the  wreck  of  the  old  one.  Dewing,  op.  cit.,  should  be  consulted  for  details. 
—  Ed. 

Note,  A  more  impartial  account  will  be  found  in  Dewing's  Corporate  Promo- 
tions and  Reorganizations,  1914,  chapter  XVIII.  At  p.  505  he  alleges  this  was 
practically  a  partisan  document.  It  is  the  official  Receiver's  report,  nevertheless, 
and  affords  admirable  matter  for  debate.    The  teacher  should  read  Dewing  carefully. 


XIII 
THE   ASPHALT   COMBINATION  i 

THE  visible  assets  of  Asphalt  Company  of  America  having 
been  sold  and  their  proceeds  distributed,  ...  it  is  proper 
that  the  Court  should  be  informed  of  certain  matters  and  things 
relating  to  the  promotion  of  Asphalt  Company  of  America,  for 
such  action  thereupon  as  the  Court  may  determine  should  be 
taken.  The  facts  hereinafter  set  forth  have  been  ascertained 
through  investigations  made  by  the  Receivers  continuing  from 
immediately  after  their  appointment  up  to  the  present  time. 

Asphalt  Company  of  America  was  incorporated  under  the 
laws  of  the  state  of  New  Jersey,  June  28,  1899,  with  an  author- 
ized capital  stock  of  ^30,000,000,  divided  into  600,000  shares  of 
the  par  value  of  $50  each.  The  corporation  was  the  outcome 
of  plans  previously  arranged  by  and  among  some  or  all  of  the 
persons  hereinafter  mentioned  as  promoters,  the  essential  fea- 
tures of  which  were  (i)  the  transfer  to  the  corporation  of  the 
shares  of  stock  of  certain  other  corporations  engaged  in  the 
asphalt  business  and  more  or  less  competitive  in  character, 
and  the  issue  to  the  owners  of  such  shares,  so  transferring 
their  holdings,  of  Collateral  Gold  Certificates,  in  the  nature  of 
bond  obligations  of  the  new  corporation  in  exchange  for  said 
shares  of  stock,  the  terms  of  exchange  being  mutually  arranged, 
the  shares  of  stock  so  transferred  then  being  deposited  with  a 
trust  company  (The  Land  Title  and  Trust  Company  being 
selected)  as  security  for  the  payment  of  the  interest  and  princi- 
pal of  the  said  certificates.     (2)  The  providing  of  working  capital 

1  From  Transcript  of  Record,  U.  S.  Circuit  Court  of  Appeals  for  the  Third  Circuit, 
September  Term,  1903.  The  Land  Title  and  Trust  Co.  v.  Henry  Tatnall  as 
Receiver  of  Asphalt  Co.  of  America,  etc.,  pp.  370-380.  Receiver's  Report  on 
Promoters'  Liability,  etc.  A  more  aciequate  account  of  the  affair  will  be  found  in  A. 
S.  Dewing,  Corporate  Promotions  and  Reorganization,  Harvard  Economic  Studies, 
1914,  chapter  XV.  The  economic  background  will  be  especially  appreciated  by  the 
teacher. 

439 


440 


TRUSTS,    POOLS   AND    CORPORATIONS 


for  the  new  corporation  by  calls  upon  its  capital  stock.  In  the 
case  of  the  transfer  of  the  shares  of  stock  by  some  of  the  said 
companies  to  the  new  corporation,  it  was  stipulated  that,  in  addi- 
tion to  the  purchase  price  to  be  paid  in  Collateral  Gold  Certifi- 
cates, the  vendors  should  have  the  privilege  of  purchasing  stock 
of  Asphalt  Company  of  America,  without  premium  at  par,  to  the 
amount  of  50  per  cent  of  the  par  value  of  the  stock  deposited 
by  them.  The  following  is  a  list  of  the  corporations  whose  shares 
of  stock  to  the  amounts  and  on  the  terms  therein  stated  were 
transferred  to  Asphalt  Company,  and  Collateral  Gold  Certificates, 
to  the  amounts  therein  mentioned  paid  therefor : 


Name  of  Company 


Barber  Asphalt  Paving 
Company 

The  New  Trinidad  Lake 
Asphalt  Company    .     . 

Alcatraz      Company      of 

West  Virginia  .  .  . 
United  Asphalt  Company 
Atlantic  Alcatraz  Asphalt 

Company 

Southern  Asphalt  Paving 

Company 

Alcatraz  Paving  Company 
Alcatraz  Asphalt  Paving 

Company 

Warren-Scharf     Asphalt 

Paving  Company  .  . 
Utica  Paving  Company  . 
Denver  Paving  Company 
Southwestern       Alcatraz 

Asphalt  &  Construction 

Company 

Alcatraz        Construction 

Company 


Total 
No.  of 
Sh.\res 


Par 

Value 


39,000 
50,000 

800,000 
40,000 

1,000 

250 
1,000 

1,000 

9,500 

250 

35,000 

2,000 
1,500 


$100.00 

4S.50 


Shares 

Pur- 
chased 


5.00 
100.00 


100.00 
50.00 


100.00 

100.00 

1. 00 


100.00 
100.00 


38,993 

49,550 
50 

799,900 
39.975 

995 

245 
995 

995 

9,48 
245 
34,950 


1,995 
1,495 


Price 
PAm 


Cost  in 
Cash 


S300.OO 

100.00 

84.886 

6.00 
91.808 


1020.00 
500.00 

150.00 

240.00 
510.21 

5-714 


64.16 
104.31 


Cost  in 
Certificates 


$11,697,900.00 
4,955,000.00 


S4244.32 


5618.42 


4,799,400.00 
3,670,000.00 

995,000.00 

249,900.00 
497,500.00 

149,250.00 

2,278,320.00 
125,001.45 
199,714.09 


127,999.20 
155,94345 


The  evidence  in  the  possession  of  the  Receiver  shows  that  the 
persons  who  transferred  to  Asphalt  Company  of  America  the 
shares  of  stock  in  the  above  named  corporations,  receiving  Col- 


THE   ASPHALT   COMBINATION 


441 


lateral  Gold  Certificates  of  the  former  company  therefor,  had 
been  holders  of  shares  of  stock  of  some  of  the  companies  prior 
to  the  inauguration  of  the  plan  which  was  subsequently  consum- 
mated of  transferring  them  to  Asphalt  Company  of  America. 
In  the  case  of  some  of  the  companies,  however,  some  of  the 
vendors  who  were  connected  with  the  organization  of  Asphalt 
Company  of  America  as  promoters,  purchased  the  whole  or  some 
part  of  the  shares  which  they  exchanged  for  Collateral  Gold  Cer- 
tificates on  the  above  terms,  after  they,  with  others,  had  deter- 
mined upon  such  organization  and  either  while  it  was  in  process 
of  organization  or  after  it  was  actually  incorporated.  The  essen- 
tial purpose  of  this  report  is  to  show  to  the  Court  the  facts  which 
have  come  to  the  Receiver's  knowledge  as  to  those  purchases,  and 
to  recommend  action  thereon. 

The  organization  of  Asphalt  Company  of  America  appears  to 
have  been  under  consideration  as  early  as  March  6,  1899,  and 
to  have  been  entered  upon  very  shortly  thereafter.  At  that  time 
the  following  persons  appear  to  have  been  holders  of  record 
of  shares  of  stock  of  some  of  the  corporations  which  were  sub- 
sequently combined  in  the  manner  above  stated,  to  about  the 
followino:  amounts : 


Barber  Asphalt  Paving 

The  New  Trinidad  Lake 

Company 

Asphalt  Company 

Shares 

Shares 

Amzi  L.  Barber  held    .    .     . 

5507 

4394 

Francis  V.  Greene  held 

900 

1822 

George  W.  Elkins  held 

183I 

1639 

J.  J.  Albright  held  .     . 

2613 

3050 

Edmund  Hayes  held    . 

1264 

2131 

C.  K.  Robinson  held   . 

281 

997 

E.  Burgess  Warren  held 

5164 

4849 

Wm.  L.  Elkins  held    . 

500 

— 

Geo.  D.  Widener  held 

109I 

1273 

William  H.  Crocker  held 


Alcatraz  Company'  of 
West  Virginia 


Shares 
401,320 


Denver  Pa\ing  Company 


Shares 
186^ 


442 


TRUSTS,    POOLS   AND    CORPORATIONS 


Some  of  the  above  named  parties  then  acquired  shares  of 
stock  of  other  companies  subsequently  turned  into  the  combina- 
tion, and  they  also  acquired  more  shares  of  stock  of  some  of  the 
companies  in  which  they  already  had  interests.  Some  of  the 
shares  of  stock  so  acquired  were  then  transferred  to  Asphalt 
Company  of  America,  when  incorporated,  at  prices  payable  in 
Collateral  Gold  Certificates  in  excess  of  the  prices  at  which  they 
were  respectively  obtained  by  the  purchasers,  and  the  Receiver 
believes  that  further  investigation  will  show  that  all  of  said  shares 
were  transferred  by  the  said  purchasers  to  Asphalt  Company  of 
America  at  a  profit.  So  far  as  the  Receiver  knows,  no  disclosure 
to  Asphalt  Company  of  America  was  made  by  the  persons  who 
so  transferred  their  shares  of  stock  to  it  of  the  profits  received 
by  them.  All  of  the  above  named  parties,  it  is  believed,  were 
beneficially  interested  in  the  acquisition  of  some  of  said  shares, 
and  in  their  transfer  to  Asphalt  Company  of  America. 

The  facts  in  detail  for  the  consideration  of  the  Court  follow  : 


As  to  United  Asphalt  Company. 

Amzi  L.  Barber,  Francis  V.  Greene  and  George  W.  Elkins 
each  transferred  to  Asphalt  Company  of  America  13,325  shares 
of  stock  of  this  company,  aggregating  39,975  shares.  Amzi  L. 
Barber  and  George  W.  Elkins  each  received  therefor  ^1,223,300, 
and  Francis  V.  Greene  received  $1,223,400,  in  Collateral  Gold 
Certificates  of  Asphalt  Company  of  America,  the  said  three  parties 
receiving  as  a  whole  $3,670,000  of  said  certificates.  At  the  time 
of  said  transfers  United  Asphalt  Company  was  the  holder,  either 
in  its  corporate  name,  or  by  its  representatives,  of  practically 
the  entire  capital  stock  of  four  corporations  known  as  Colum- 
bia Construction  Company,  of  New  York ;  Trinidad  Bituminous 


THE   ASPHALT   COMBINATION  443 

Asphalt  Company,  of  New  Jersey;  Standard  Asphalt  Company, 
of  New  Jersey,  and  Rock  Creek  Natural  Asphalt  Company  o| 
Kansas.  The  shares  of  capital  stock  of  these  corporations  con- 
stituted its  entire  assets.  The  evidence  in  the  possession  of  the 
Receiver  points  to  the  fact  that  these  shares  of  stock  were 
bought  by  or  under  the  direction  of  Amzi  L.  Barber,  Francis  V. 
Greene  and  George  W.  Elkins,  with  money  or  obligations  fur- 
nished, or  procured,  by  them  to  be  furnished  as  follows  : 

For  the  stock  of  Columl)ia  Construction  Company      .         .         .  $250,000 

"              "        Trinidad  Bituminous  Asphalt  Company    .         .  150,000 

"              "        Standard  Asphalt  Company      ....  200,000 

"             "        Rock  Creek  Natural  Asphalt  Company    .         .  iS,ooo 

$618,000 

Said  purchases  were  made  between  March  21  and  August 
4,  1899.  In  the  meantime  United  Asphalt  Company  had  been 
organized  as  a  holding  company,  and  on  July  12,  1899,  ^3>3^S 
shares  of  its  capital  stock  were  issued  to  Amzi  L.  Barber,  Francis 
V.  Greene  and  George  W.  Elkins  each,  making  39,975  shares 
in  the  aggregate,  issued  to  them  out  of  a  total  capital  stock  of 
40,000  shares.  The  above  39,975  shares  were  subsequently,  on 
July  15,  1899,  transferred  to  Asphalt  Company  of  America  for 
1^3,670,000  of  its  Collateral  Gold  Certificates.  The  first  sales  of 
the  Temporary  Certificates  standing  for  said  Collateral  Gold 
Certificates  were  in  August,  1899,  in  the  neighborhood  of  90 
per  cent  of  par.  Taking  the  value  of  the  Collateral  Gold  Cer- 
tificates at  97  per  cent  of  par,  the  highest  price  at  which  said 
certificates  sold,  the  profit  each  of  the  said  three  parties  to  said 
transaction  was  about  ;$98o,6oi,  and  to  all  of  them  together  was 
about  ^2,941,803.  Taking  the  value  of  the  said  certificates  at 
89;}  per  cent  of  par,  which  was  their  lowest  market  price  in 
August,  1899,  the  profit  to  each  of  said  parties  was  about 
.853-50,  and  to  all  of  them  together  was  about  $2,666,560.50. 


As  to   Warren- Sclinrf  Asphalt  Paving  Company. 

Amzi  L.  Barber,  Francis  V.  Greene  and  George  W.  Elkins 
each  transferred  to  Asphalt  Company  of  America  3164  shares 
(George  W.  Elkins  transferring  3165  shares)  of  stock  of  War- 
ren-Scharf  Asphalt  Paving  Company,  aggregating  9493  shares 


444  TRUSTS,    POOLS   AND   CORPORATIONS 

out  of  a  total  capital  stock  of  9500  shares.  They  each  received 
therefor  $759,360  (George  W.  Elkins  receiving  $759,600)  in 
Collateral  Gold  Certificates.  The  said  three  persons  received  as 
a  whole  $2,278,320  par  of  said  certificates. 

The  said  three  persons  had  previously  purchased  from  the 
then  owners  the  said  shares  of  stock  at  an  outlay  to  them  of 
about  $1,500,000,  and  the  said  shares  were  transferred  into  their 
names  on  July  27,  1899.  The  transfers  of  said  shares  by  them 
to  Asphalt  Company  of  America  were  made  on  July  31,  1899, 
and  the  above  mentioned  temporary  certificates  of  said  company 
were  issued  to  them  therefor.  Taking  the  value  of  the  Collateral 
Gold  Certificates  at  97  per  cent  of  par,  the  profit  to  each  of  the 
said  three  parties  to  said  transaction  was  about  $236,579,  and  to 
all  of  them  together  was  $709,970.  Taking  the  market  value  of 
the  certificates  at  89I  per  cent  of  par,  the  profit  to  each  of  the 
said  parties  was  about  $179,627.20,  and  to  all  of  them  together 
about  $539,096. 

From  certain  papers  in  the  possession  of  Receiver  it  would 
appear  that  the  moneys  necessary  to  purchase  said  shares  of 
stock  from  the  preceding  holders  were  contributed  by  the  fol- 
lowing parties  in  the  following  proportions,  and  the  Receiver 
believes  that  distribution  of  Collateral  Gold  Certificates  was 
made  to  said  parties  in  proportion  to  their  contribution  to  pur- 
chase money  as  follows,  and  that  they  shared  the  profits 
proportionately : 


J.  J.  Albright     . 
A.  L.  Barber 
F.  V.  Greene     . 
Edmund  Hayes 
C.  K.  Robinson 
Geo.  D.  Widener 
E.  B.  Warren    . 
Geo.  W.  Elkins 
Wm.  L.  Elkins 
Sydney  F.  Tyler 


Payment  of 
Purchase  Money 


233.175 
50,550 
64,950 
20,325 
49,800 

215,325 
250,000 
250,000 
250,000 


Distribution  of 

Collateral 

Gold  Certificates 


$176,130 

334,426 

76,836 

98,724 

30,894 
75,696 

327,294 
380,000 
380,000 
380,000 


THE   ASPHALT   COMBINATION 


445 


As  to  The  New  Trinidad  Lake  Asphalt  Company,  Limited. 

Shortly  after  the  organization  of  Asphalt  Company  of  America , 
was  projected,  the  Board  of  Directors  of  Barber  Asphalt  Com- 
pany, which  company  owned  171 8  shares  of  the  capital  stock  of 
The  New  Trinidad  Lake  Asphalt  Company,  Limited,  caused  said 
shares  to  be  offered  for  sale  to  its  stockholders.  This  action  was 
taken  pursuant  to  the  authorization  of  its  Executive  Committee, 
acting  as  a  Board  of  Directors,  on  March  15,  1899,  and  was  ap- 
proved by  the  Board  on  March  29,  1899,  the  said  Board  of 
Directors  being  composed  at  the  time  of  the  following  persons : 
J.  J.  Albright,  Amzi  L.  Barber,  Francis  V.  Greene,  Edmund 
Hayes,  C.  K.  Robinson,  George  D.  Widener,  George  W.  Elkins, 
E.  Burgess  Warren,  and  P.  W.  Henry.  1638  of  the  said  shares 
of  stock  of  The  New  Trinidad  Lake  Asphalt  Company,  Limited, 
were  thereupon  bought  by  the  stockholders  of  Barber  Asphalt 
Paving  Company  at  the  limit  fixed  by  the  Executive  Committee 
in  its  resolution  for  their  sale,  to  wit,  $48.50  per  share.  1515 
of  the  said  shares  so  bought  were  purchased  and  paid  for  by  the 
following  persons  who  were  also  Directors  of  Barber  Asphalt 
Paving  Company  at  the  rate  of  $48.50  per  share,  to  wit: 

J.  J.  Albright       . 
Amzi  L.  Barber 
Francis  V.  Greene 
Edmund  Hayes  . 
C.  K.  Robinson 
George  D.  Widener 
George  W.  Elkins 
E.  Burgess  Warren 

After  said  purchases  of  said  shares  of  stock  at  $48.50  per 
share,  they  were  transferred  to  Asphalt  Company  of  America  at 
the  valuation  of  $100  per  share  and  Collateral  Gold  Certificates 
were  received  in  exchange  therefor  to  the  amount  in  the  aggregate 
at  par  of  $151,500. 

The  Receiver  believes  it  can  be  established  that  the  said  parties 
shared  in  the  profits  of  said  purchases  and  sales  in  proportion  to 
their  said  holdings. 

Taking  the  Collateral  Gold  Certificates  at  97  per  cent  of  par, 
the  profit  to  said  parties  from  the  said  purchases  and  transfers 


210 

shares 

206 

178 

20Q 

103 

207 

211 

211 

446  TRUSTS,    POOLS   AND   CORPORATIONS 

amounted  to  573,477-  Taking  the  value  of  the  Collateral  Gold 
Certificates  at  89.}  per  cent  of  par,  the  profit  to  the  said  parties 
amounted  to  ^62,5 15. 

As  to  Alcatraz  Company. 

William  H.  Crocker  transferred  to  Asphalt  Company  of  Amer- 
ica on  or  about  August  3,  1899,  799,650  shares  of  the  capital 
stock  of  Alcatraz  Company  of  West  Virginia.  Prior  to  the 
formation  of  the  plan  of  organization  of  the  Asphalt  Company 
of  America  the  said  Crocker  was  the  holder  of  record  of  401,320 
shares  of  said  company,  the  balance  of  the  holdings  transferred 
by  him  to  Asphalt  Company  of  America,  to  wit,  398,330  shares, 
having  been  acquired  by  him  after  March  8,  1899.  The  Receiver 
has  not  as  yet  been  able  to  obtain  information  as  to  the  amount 
paid  by  the  said  Crocker  for  said  398,330  shares  transferred  into 
his  name  after  the  organization  of  Asphalt  Company  of  America 
was  determined  upon,  nor  what  profit,  if  any,  was  made  by  him 
on  the  purchase  or  other  acquisition  by  him  of  said  shares  and 
the  sale  thereof  to  Asphalt  Company  of  America.  The  said 
shares,  with  the  other  shares  previously  held  by  him  ($5  par 
value),  were  transferred  to  Asphalt  Company  of  America  at  the 
rate  of  $6  per  share,  payable  in  Collateral  Gold  Certificates. 
The  actual  sum  received  by  him  in  Collateral  Gold  Certificates 
for  the  shares  obtained  by  him  after  the  plan  of  organization  of 
Asphalt  Company  of  America  was  determined  upon  was  at  par 
1^2,389,980.  The  Receiver  has  reason  to  believe  that  a  substan- 
tial profit  was  made  by  the  said  Crocker  in  said  transaction.  He 
is  advised  that  the  relation  of  the  said  Crocker  to  the  enterprise 
was  that  of  a  promoter,  and  that  whatever  profit  was  obtained  by 
him  he  is  in  law  obliged  to  pay  to  the  Receiver  of  the  Asphalt 
Company  of  America. 

As  to  Denver  Paving  Company. 

The  said  William  H.  Crocker  transferred  to  Asphalt  Company 
of  America  28,725  shares  of  Denver  Paving  Company  stock  at 
the  rate  of  ^5.71  428/1000  per  share  (the  shares  being  $\  par) 
and  received  in  exchange  therefor  at  par  ^164, 142.69  in  Collateral 
Gold  Certificates.     He  was  the  holder  of  record  prior  to  the 


THE   ASPHALT   COMBINATION  447 


formation  of  the  plan  of  organization  of  Asphalt  Company 
America  of  only  1863  of  said  shares.     The  balance'of  his  hoi 


of 

)ld- 

ings  transferred  to  Asphalt  Company  of  America  as  aforesaid, 
26,862  shares,  appears  to  have  been  acquired  by  him  after  the 
plan  of  organization  of  Asphalt  Company  of  America  was  entered 
upon.  The  actual  sum  received  by  him  in  Collateral  Gold  Cer- 
tificates for  said  shares,  so  as  aforesaid  subsequently  obtained, 
was  at  par  $153,496.98.  The  Receiver  has  reason  to  believe 
that  a  substantial  profit  was  made  by  the  said  Crocker  in  the 
said  transaction.  He  is  advised  that  the  relation  of  the  said 
Crocker  to  the  enterprise  was  that  of  a  promoter,  and  that 
whatever  profit  was  obtained  by  him,  he  is  in  law  obliged  to  pay 
to  the  Receiver  of  Asphalt  Company  of  America. 

As  to  Alcatraz  Paving  Company. 

William  J.  Latta  transferred  to  Asphalt  Company  of  America, 
in  July,  1899,  305  shares  of  Alcatraz  Paving  Company  ($100 
par)  at  the  rate  of  $500  per  share,  payable  in  Collateral  Gold 
Certificates  of  Asphalt  Company  of  America.  The  actual  sum 
received  by  him  for  the  said  shares,  payable  in  Collateral  Gold 
Certificates  at  par  aforesaid,  was  $152,500.  Prior  to  the  forma- 
tion of  the  plan  of  organization  of  Asphalt  Company  of  America 
the  said  Latta  was  the  holder  of  record  of  only  30  of  said 
shares  of  stock.  He  appears  to  have  acquired  275  of  the  shares 
transferred  to  Asphalt  Company  of  America  as  aforesaid  after 
said  date.  The  actual  sum  received  by  him  in  Collateral  Gold 
Certificates  for  said  275  shares  was  $137,500.  The  Receiver  has 
reason  to  believe  that  a  substantial  profit  was  made  by  the  said 
Latta  in  said  transaction.  He  is  advised  that  the  relation  of  the 
said  Latta  to  the  enterprise  was  that  of  a  promoter  and  that 
whatever  profit  was  obtained  by  him  he  is  in  law  obliged  to  pay 
to  the  Receiver  of  Asphalt  Company  of  America. 

As  to  Southwestern  Alcatraz  Asphalt  &  Construction  Company. 

Harry  C.  Spinks  transferred  to  Asphalt  Company  of  America 
on  or  about  August  10,  1899,  1995  shares  of  the  stock  of  the 
Southwestern  Alcatraz  Asphalt  &  Construction  Company  at  the 
rate  of  $64.16  per  share,  payable  in  Collateral  Gold  Certificates 


448  TRUSTS,    POOLS   AND   CORPORATIONS 

of  Asphalt  Company  of  America.  He  received  therefor  in  said 
certificates  at  par  $127,999.20.  The  said  Spinks  actually  held 
of  record  prior  to  the  entry  upon  the  plan  of  organization  of 
Asphalt  Company  of  America  only  585  of  said  shares.  The 
evidence  in  the  Receiver's  possession  indicates  that  he  obtained 
from  various  other  persons  after  said  date  1410  of  said  shares 
which  he  transferred  to  Asphalt  Company  of  America  upon  the 
total  consideration  payable  in  Collateral  Gold  Certificates  at  par 
$90,465.60.  The  Receiver  has  not  as  yet  been  able  to  ascertain 
what  profit  the  said  Spinks  made  out  of  the  purchase  of  said 
shares  and  the  transfer  thereof  to  Asphalt  Company  of  America. 
He  is  advised,  however,  that  the  relations  of  the  said  Spinks  to 
the  organization  of  Asphalt  Company  of  America  were  such  that 
he  is  obliged  to  account  for  and  pay  over  whatever  profit  he 
obtained  in  connection  with  the  said  transaction. 

From  the  facts  which  have  come  to  the  knowledge  of  the 
Receiver  he  believes  that  some  or  all  of  the  parties  above  named, 
to  wit,  Amzi  L.  Barber,  Francis  V.  Greene,  George  W.  Elkins, 
J.  J.  Albright,  Edmund  Hayes,  C.  K.  Robinson,  E.  Burgess 
Warren,  William  L.  Elkins,  George  D.  Widener,  Sydney  F. 
Tyler,  William  H.  Crocker,  William  J.  Latta  and  Harry  C. 
Spinks,  can  be  estabhshed  to  have  been  promoters  of  Asphalt 
Company  of  America,  and  that  they  made  profits  in  connection 
with  its  organization  in  the  manner  above  stated,  which  they 
are  obliged  to  account  for,  and  that  they  can  be  compelled  to 
account  for  and  pay  over  the  same.  He  therefore  recommends, 
the  premises  considered,  that  he  be  authorized  by  the  Court  to 
take  such  proceedings  against  the  said  parties,  or  any  of  them, 
by  suit  or  suits  in  law  or  equity,  as  he  may  be  advised  are  proper, 
and  as  he  may  deem  expedient  under  the  facts  as  they  exist  and 
shall  be  made  to  appear  upon  further  investigation,  with  a  view 
to  collecting  all  profits  that  were  made  by  the  said  persons,  or 
any  of  them,  in  connection  with  the  organization  of  Asphalt 
Company  of  America  and  the  transfer  of  securities  to  it.  He 
also  recommends  that  he  be  authorized  to  bring  like  proceedings 
against  any  other  persons  whom  he  may  hereafter  ascertain  to 
have  obtained  such  profits. 

He  respectfully  calls  attention  of  the  Court  to  the  fact  that 


I 


THE    ASPHALT   COMBINATION  449 

an  Act  of  Limitation  was  passed  by  the  Legislatur^^jof  the  state 
of  New  Jersey  at  the  last  session,  approved  the  8th  day  of  April,, 
1903,  which  limits  the  period  during  which  suits  may  be  brought 
against  directors,  officers,  promoters  and  other  agents  of  cor- 
porations of  the  state  to  recover  unlawful  profits  made  by  them, 
to  the  period  of  four  years  from  and  after  the  making  or  receipt 
of  such  profits.  A  saving  clause  being,  however,  incorporated 
in  the  said  Act  which  permits  such  suits  which  otherwise  would 
be  barred  to  be  brought  within  six  months  after  the  Act  took 
effect.  The  result  of  the  passage  of  the  said  Act  is  that  pro- 
ceedings against  promoters  in  connection  with  Asphalt  Company 
of  America  with  a  view  to  the  recovery  of  unlawful  profits  ob- 
tained by  them  as  the  Receiver  is  advised,  must  be  begun  before 
October  8,  1903.  He  therefore  respectfully  urges  upon  the  Court 
the  desirability,  if  it  should  seem  proper  that  the  Court  instruct 
that  any  suits  of  this  kind  be  brought,  that  the  authorization  to 
him  to  so  proceed  be  given  forthwith. 

Respectfully  submitted, 

Henry   Tatnall, 

Receiver  Asphalt  Company  of  America 
July  6, 1903 

It  is  scarcely  to  be  expected  that  a  company  launched  under  the  conditions 
described  in  the  foregoing  report  should  have  a  successful  career.  Two 
reorganizations  promptly  followed  in  less  than  four  years.  The  original 
Asphalt  Company  of  America,  organized  in  July,  1899,  acquired  the  stocks  of 
a  large  number  of  competing  concerns,  issuing  in  payment  therefor  $30,000,000 
of  collateral  trust  bonds.  These  bonds  were  issued  on  the  security  of  the 
stock  so  acquired.  The  next  step  was  to  assure  the  control  of  the  enterprise 
by  the  promoters  through  ownership  of  a  majority  of  the  capital  stock. 
Accordingly  practically  all  of  the  original  stock  subscriptions  were  taken  in 
the  name  of  two  dummies.  A  large  part  of  this  issue  of  original  stock  was 
immediately  turned  over  to  the  promoters,  giving  them  virtual  control  of  the 
enterprise.  The  stock  was  not  paid  for  in  full,  but  an  amount  equivalent  to 
20  per  cent  of  the  par  value,  which  was  $50  per  share,  was  actually  paid. 
The  funds  to  meet  this  partial  payment  on  the  stock  held  by  the  promoters 
were  raised  by  a  sale  of  the  balance  of  the  stock  not  held  by  insiders  to  the 
public  at  prices  ranging  as  high  as  $19  per  share.  Thus  did  the  promoters 
acquire  control  of  the  holding  company  without  any  additional  investment  on 
their  part;  and  at  the  same  time  possess  themselves  of  a  volume  of  bonds, 
which,  on  the  basis  of  the  excessive  payments  described  in  the  preceding 


450  TRUSTS,    POOLS   AND    CORPORATIONS 

're|)ort,  proved  more  than  sufficient  to  absorb  the  entire  earnings  of  the 
consolidation. 

The  existence  of  a  stoclcholders'  liability  for  the  remaining  four-fifths  of  the 
par  value  of  the  capital  stock  was  the  cause  of  the  speedy  reorganization  of 
the  company  in  May,  1900.  By  reason  of  fraudulent  and  reckless  accounting, 
as  partially  indicated  by  our  preceding  reprint,  the  inevitable  bankruptcy  of 
the  parent  company  was  hidden  from  the  public  temporarily.  In  brief,  the  As- 
phalt Company  of  America  was  superseded  in  May,  1900,  by  a  new  company  enti- 
tled the  National  Asphalt  Company.  This  new  corporation  issued  $6,000,000 
of  Collateral  Gold  Certificates  which  were  used  to  take  up  the  stock  of  the 
old  corporation.  In  addition,  its  own  capital,  amounting  to  $22,000,000,  was 
used  in  part  to  acquire  control  of  formidable  competitors  who  had  invaded 
the  field,  and  in  part  as  a  bonus  to  secure  deposit  of  the  old  underlying  bonds. 
In  December,  1901,  this  company,  in  turn,  went  into  the  hands  of  a  receiver. 
Then  began  a  long  series  of  suits  and  countersuits  in  connection  with  the 
activity  of  a  reorganization  committee  ;  which,  judged  by  results,  seems  to  have 
been  working  in  the  interest  of  insiders.  The  outcome  of  the  matter  was  the 
final  organization  in  May,  1903,  of  the  General  Asphalt  Company  which  ac- 
quired the  properties  of  its  predecessors,  sold  at  auction  for  a  trifle  over 
$6,000,000.  This  General  Asphalt  Company  was  capitalized  at  $31,000,000, 
in  place  of  $60,000,000  of  stock  and  bonds  issued  by  the  original  Asphalt 
Company  of  America.  The  troublesome  underlying  bonds  of  the  first  com- 
pany were  to  be  retired  by  exchange  for  preferred  stock ;  and  the  common 
stock  was  issued  in  part  to  raise  working  capital. 

A  partial  recovery  of  the  enormous  losses  by  innocent  investors  could  be 
effected  only  in  two  wa3's.  Successful  suits  against  the  promoters  for  unre- 
vealed  profits  in  the  organization  of  the  company  might  be  hoped  for,  fol- 
lowing precedents  in  a  number  of  recent  cases,  notably  that  of  the  East 
Tennessee  Land  Company.  In  addition  it  was  possible  that  the  Receiver 
might  be  able  to  hold  the  original  stockholders  liable  for  the  balance  of  their 
payments  on  the  capital  stock  of  the  Asphalt  Company  of  America.  This  latter 
should  amount  to  about  $24,000,000,  while  at  the  same  time  it  was  hoped  that 
nearly  $3,000,000  could  be  extorted  from  the  promoters.  The  first  of  these 
remedies  against  the  promoters,  however,  has  now  been  closed  through  pur- 
chase by  the  promoters  themselves  of  all  the  outstanding  bonds.  As  repre- 
senting all  the  creditors  of  the  company,  they  have  asked  the  Court  to 
discontinue  the  suits.  This  has  been  done.  Moreover,  the  Receiver  has 
abandoned  the  attempt  to  assess  the  stockholders  for  their  unpaid  capital  stock 
on  the  ground  that  such  suits  cannot  be  successfully  prosecuted.  Thus  closes 
a  story  of  fraud  and  financial  rottenness  not  less  enlightening  than  that  of 
the  United  States  Shipbuilding  Company,  as  showing  the  necessity  for  provi- 
sion by  law  to  secure  a  reasonable  amount  of  publicity  in  the  finances  of  monop- 
olistic combinations.  —  Ed. 


1 


XIV 

TRADE    COMBINATIONS    AT    COMMON    LAW  ^ 

THE  rule  that  all  contracts  in  restraint  of  trade  were  void, 
was  early  established  in  the  English  law.  The  first  case 
in  which  this  principle  was  announced  is  said  to  have  been 
decided  in  the  reign  of  Henry  V.^  In  this  case  an  action  for 
debt  was  brought  on  a  bond,  conditioned  that  the  defendant 
should  not  use  his  art  of  a  dyer's  craft  within  a  certain  city  for 
six  months.  Judge  Hall  declared  the  bond  void,  and  expressed 
his  indignation  at  this  attempt  to  restrain  trade  by  exclaiming, 
"  And,  by  God,  if  the  plaintiff  were  here,  he  should  go  to  prison 
till  he  paid  a  fine  to  the  king."  This  refusal  to  recognize  the 
validity  of  any  contract  in  restraint  of  trade  was  for  a  long  time 
characteristic  of  the  English  law ;  but  gradually  the  rule  was 
relaxed. 

The  modern  application  of  this  rule  was  very  well  expressed 
by  Judge  Christiancy  in  the  case  of  Hubbard  v.  Miller?  Dis- 
senting from  the  doctrine  sometimes  laid  down,  that  all  contracts 
in  restraint  of  trade  are  prima  facie  or  presumptively  void,  he 
said : 

If,  considered  with  reference  to  the  situation,  business  and  objects  of 
the  parties,  and  in  the  light  of  all  the  surrounding  circumstances  with 
reference  to  which  the  contract  was  made,  the  restraint  contracted  for 
appears  to  have  been  for  a  just  and  honest  purpose,  for  the  protection 
of  the  legitimate  interests  of  the  party  in  whose  favor  it  is  imposed,  rea- 
sonable as  between  them,  and  not  especially  injurious  to  the  public,  the 
restraint  will  be  held  valid. ^ 

1  From  the  Political  Science  Quarterly,  vol.  XII,  1897,  pp.  212-245.  Cf.  also 
p.  561  ff.,  infra. 

2  See  Year  Book,  2  Henry  V,  fol.  5,  pi.  26.  3  27  Mich.  15. 

*  This  statement  was  really  nothing  but  an  elaboration  of  the  rule  which  had  long 
before  been  laid  down  in  the  Enghsh  courts  by  Chief  Justice  Tindal,  in  the  case  of 
Horner  v.  Neves,  7  Bing.  743. 

451 


452  TRUSTS,    POOLS   AND    CORPORATIONS 

Under  this  rule  two  interests  are  to  be  considered,  those  of 
the  parties  to  the  contract  and  those  of  the  public.  As  to  the 
former,  the  rule  was  laid  down  that  no  contract  which  did  not 
benefit  both  parties  to  the  contract  should  be  regarded  as  reason- 
able ;  as  to  the  latter,  no  contract  in  restraint  of  trade  was  to  be 
regarded  as  lawful  which  was  injurious  to  the  public.  As  a  mat- 
ter of  fact,  most  of  the  cases  actually  decided  have  turned  exclu- 
sively on  the  interests  of  the  parties,  and  the  tendency  of  the 
courts  has  therefore  been  to  relax  very  greatly  the  old  rule  of  the 
common  law.  This  tendency  probably  reached  its  culmination 
in  a  case  decided  in  1887,  by  the  New  York  Court  of  Appeals, 
Diamond  Match  Co.  v.  Roebcr}  Here  the  Court  was  called 
upon  to  construe  a  contract  made  by  Roeber  with  the  Swift, 
Courtney  &  Beecher  Co.,  the  grantor  of  the  Diamond  Match 
Co.,  in  which  he  agreed  that  he  would  not  within  ninety-nine 
years,  except  in  the  capacity  of  agent  or  employee  of  the  Swift, 
Courtney  &  Beecher  Match  Co.,  directly  or  indirectly  engage  in 
the  manufacture  or  sale  of  friction  matches  in  any  part  of  the 
United  States  except  Nevada  and  Montana.  The  Court  held  the 
contract  to  be  valid,  although  practically  in  general  restraint  of 
trade,  saying: 

When  the  restraint  is  general,  but  at  the  same  time  is  coextensive 
only  with  the  interest  to  be  protected  and  with  the  benefit  meant  to  be 
conferred,  there  seems  to  be  no  good  reason  why  as  between  the  parties 
the  contract  is  not  as  reasonable  as  when  the  interest  is  partial  and  there 
is  a  corresponding  partial  restraint.. 

But  the  Court  of  Appeals,  in  making  this  decision,  did  not 
intend  to  depart  from  the  old  rule,  so  far  as  the  maintenance  of 
that  old  rule  was  necessary  for  the  protection  of  the  interest  of 
the  public.     It  said  distinctly: 

Covenants  of  the  character  of  the  one  now  in  question  operate  simply 
to  prevent  the  covenanter  from  engaging  in  the  business  which  he  sells, 
so  as  to  protect  the  purchaser  in  the  enjoyment  of  what  he  has  purchased. 
To  the  extent  that  the  contract  prevents  the  vendor  from  carrying  on 
the  particular  trade,  it  deprives  the  community  of  any  benefit  it  might 

1 106  N.  Y.,  473. 


TRADE    COMBINATIONS   AT   COMMON    LAW  453 

derive  from  his  entering  into  competition  ;  hut  the  husiness  is  open  to  all 
others,  and  there  is  little  danger  that  the  public  will  suffer  ItTiTm  from  lack 
of  persons  to  engage  in  a  profitable  industry.  Such  contracts  do  not 
create  monopolies  ;  they  confer  no  special  or  exclusive  privilege.  If  con- 
tracts in  general  restraint  of  trade  where  the  trade  is  general  are  void  as 
tending  to  monopolies,  contracts  in  partial  restraint  where  the  trade  is 
local  are  subject  to  the  same  objection,  because  they  deprive  the  local 
community  of  the  services  of  the  covenanter  in  the  particular  trade  or 
calling,  and  prevent  his  becoming  a  competitor  with  the  covenantee. 

And  again : 

Combinations  between  producers  to  limit  production  and  to  enhance 
prices  are  or  may  be  unlawful,  but  they  stand  on  a  different  footing. 

This  case  has  frequently  been  cited,  as  indicative  of  a  change 
in  the  rule  of  the  common  law,  and  as  establishing  the  proposi- 
tion that  in  our  present  economic  conditions  the  policy  of  the 
law  is,  in  order  to  promote  the  greatest  freedom  of  contract,  not 
to  declare  void  contracts  even  in  total  restraint  of  trade.  But 
the  Court  of  Appeals  based  its  decision  upon  the  express  ground 
that  the  public  interest  was  not  involved.  While  holding  valid 
the  particular  contract  before  it,  although  in  general  restraint  of 
trade,  the  Court  specifically  declared  that  combinations  to  raise 
prices  stood  upon  a  different  footing,  and  recognized  the  fact 
that  where  the  public  interest  was  involved,  the  rule  might  well 
be  different.  The  common  law  has  all  along  refused,  and  does 
now  refuse,  to  recognize  the  validity  of  agreements  made  between 
individuals  for  the  purpose  of  raising  the  prices  of  commodities, 
and  has  stamped  any  such  attempt  as  a  criminal  conspiracy. 

I.    Agreements  aiming  to  raise  Prices  are  Invalid 

That  such  agreements  are  invalid  has  always  been  the  rule  of 
both  courts  of  equity  and  courts  of  law.  Thus,  take  the  case  of 
Craft  V.  McConojigJiy}  This  was  a  bill  in  equity  brought  for 
an  accounting  and  distribution  of  the  profits  of  an  alleged  part- 
nership based  upon  a  contract  to  the  following  effect :  Several 
grain  houses  were  put  into  the  business  upon  a  basis  of  distribut- 

1  79  111.,  346,  decided  in  1875. 


454  TRUSTS,    POOLS   AND    CORPORATIONS 

ing  shares  to  the  signers  of  the  agreement ;  each  separate  firm 
was  to  conduct  its  own  business  as  if  there  were  no  partnership 
in  existence.  It  was  to  be  the  duty  of  a  general  bookkeeper  to 
make  a  record  of  all  the  grain  bought  by  each  party,  to  debit  him 
with  the  amount  of  money  paid  for  the  same,  and  to  credit  him 
with  all  sales ;  and  at  the  end  of  every  month  each  individual 
account  was  to  be  balanced,  showing  the  profit  or  loss,  which 
amount  was  to  be  divided  pro  rata,  according  to  the  number  of 
shares  held  by  each  party.  It  was  further  agreed  that  prices 
were  to  be  fixed  from  time  to  time,  and  each  party  to  the  agree- 
ment was  to  abide  by  them.  Soon  after  the  agreement  was 
made,  one  party  to  it  died,  and  his  son  demanded  an  accounting. 
The  Court  held  that  the  agreement  was  void,  as  contrary  to  pub- 
lic policy,  and  as  being  an  attempt  to  foster  a  monopoly  and  to 
raise  prices ;  and  notwithstanding  the  fact  that  it  had  been  par- 
tially executed,  refused  to  require  an  accounting,  saying  :  "  The 
complainant  and  the  defendants  were  equally  involved  in  the 
unlawful  combination;  a  court  of  equity  will  assist  neither." 

A  similar  and  even  stronger  case,  decided  in  Pennsylvania, 
is  that  of  Nesterv.  The  Continental  Brewing  Co}  Here  an  asso- 
ciation had  been  formed  in  Philadelphia  among  the  brewers, 
for  the  purpose  of  controlling  the  sale  and  fixing  the  price  of 
beer  in  Philadelphia  and  in  Camden  and  Camden  County,  New 
Jersey.  It  was  shown  that  the  plaintiff  had  for  valuable  con- 
sideration obtained  from  a  member  of  the  association  an  assign- 
ment of  a  claim  due  such  member  from  the  association,  without 
knowledge  that  the  claim  was  based  upon  an  agreement  to  mo- 
nopolize the  sale  of  beer.  Notwithstanding  his  bona  fides,  the 
Court  refused  to  aid  him,  and  denied  his  application  for  an 
accounting. 

Not  only  courts  of  equity,  but  also  courts  of  law,  refuse  to  aid 
in  the  execution  of  such  agreements.  Thus,  in  the  case  of 
Chapin  v.  Brozvn,'^  the  grocers  engaged  in  business  in  the  town 
of  Storm  Lake  agreed  in  favor  of  a  third  person  to  quit  the 
business  of  buying  butter  for  two  years,  and  such  third  person 
agreed  to  carry  on  that  business  exclusively  for  the  same  period 

1  l6i  Pa.  St.,  473,  decided  in  1S94. 

2  g^  Iowa,  156,  decided  in  1891. 


TRADE    COMBINATIONS   AT   COMMON    LAW  455 

of  time.  In  pursuance  of  this  agreement,  the  plaintiffs  came  to 
the  town  and  engaged  in  the  business  of  buying  btrtter  ;  at  the 
commencement  of  the  suit  they  were  so  engaged,  and  had  made- 
arrangements  to  continue  the  business  for  the  period  of  two 
years.  The  defendant,  however,  continued  in  the  business  of 
buying  butter;  and  it  was  alleged  that  by  so  doing  he  had 
damaged  the  plaintiffs  to  the  extent  of  one  hundred  and  fifty 
dollars,  for  which  judgment  was  asked.  The  court  refused  the 
application  of  the  plaintiffs,  on  the  ground  that  the  agreement 
was  against  public  policy,  as  tending  to  monopolize  the  butter 
trade  at  Storm  Lake,  and  to  destroy  competition  in  that  busi- 
ness. This  case  is  particularly  interesting  because  the  agree- 
ment was  as  to  purchase  and  not  as  to  sale.  It  therefore  did 
not  result  in  disadvantage  to  the  consuming  public  generally, 
but  only  in  disadvantage  to  the  producers  of  butter.  ^ 

A  somewhat  similar  case,  More  v.  Bennett,  was  decided  in 
January,  1892,  by  the  Supreme  Court  of  Illinois.^  Here  the 
stenographers  in  the  city  of  Chicago  had  formed  an  association, 
of  which  all  the  parties  to  the  suit  were  members.  The  object 
of  the  association  was  to  establish  and  maintain  uniform  rates. 
A  schedule  had  been  adopted,  and  it  was  alleged  that  the  de- 
fendant, contrary  to  the  rules  of  the  association,  had  cut  rates 
against  the  other  members  thereof,  whereby  the  plaintiffs  had 
been  damaged.  The  Court  refused  to  pass  upon  the  question 
whether  a  contract  could  be  found  in  such  articles  of  association, 
and  decided  that,  even  if  a  contract  could  be  found,  the  agree- 
ment was  void  on  account  of  its  attempt  to  regulate  prices. 
The  Court  refused,  therefore,  to  award  damages  to  the  plaintiff. 
The  case  is  interesting  as  showing  that  the  courts  will  apply  the 
same  rules  to  the  attempt  to  regulate  the  price  of  labor  as  to  the 
attempt  to  regulate  the  price  of  commodities. 

Another  good  case  is  that  of  the  Texas  Standard  Oil  Co.  v. 
Adoue,  decided  in  Texas  in  1892.^  This  suit  was  brought  to 
recover  guaranteed  net  prices  for  all  the  products  of  certain 

1  It  is  only  fair  to  say  that  the  contract  was  declared  void,  not  only  because  it  was 
contrary  to  public  policy,  but  also  because  in  the  opinion  of  the  Court  it  was  not 
based  upon  a  consideration. 

2  140  111.,  69.  2  83  Tex.,  650. 


456  TRUSTS,    POOLS   AND    CORPOR.\TIOXS 

mills,  and  for  the  costs  and  expenses  of  production,  in  considera- 
tion of  the  strict  performance  of  all  convenants  in  a  contract. 
This  contract,  it  was  held  by  the  Court,  gave  the  defendant  an 
almost  unrestricted  field  to  obtain  the  raw  material  for  its  mills, 
and  the  exclusive  right  to  control,  free  from  the  competition  of 
the  plaintiffs  and  others,  not  only  the  sales  and  ruling  prices 
of  the  product  of  its  own  mills,  but  also  the  entire  yield  of  the 
mills  of  the  other  parties  to  the  contract.  The  Court  held  that 
the  manifest  purpose  and  natural  tendency  of  this  agreement 
were  to  prevent  competition  in  too  many  localities  —  upon  the 
one  hand,  to  reduce  the  price  of  the  raw  materials;  and  upon 
the  other,  to  enhance  that  of  the  manufactured  product  by  arti- 
ficial means,  to  the  disadvantage  and  detriment  of  the  public. 
Therefore  the  complaint  was  dismissed.^ 

A  similar  case  is  Aniott  v.  TJie  Pittston  and  Elviira  Coal 
Co?  Here  the  plaintiff's  assignor,  the  Butler  Colliery  Co.,  had 
made  an  agreement  with  the  defendants  that  it  would  not  send 
coal  north  to  any  point  except  to  the  defendants,  the  latter 
agreeing  to  take  from  the  Butler  Co.  not  exceeding  2000  tons 
of  coal  per  month.  In  pursuance  of  this  agreement,  the  Butler 
Colliery  Co.  shipped  2700  tons  to  The  Pittston  and  Elmira  Coal 
Co.,  and  the  plaintiff,  to  whom  it  had  assigned  its  claim,  brought 
suit  for  the  price  of  the  coal.  The  Court  held  that  the  contract 
was  made  by  the  defendants  with  the  purpose  of  establishing  a 
monopoly  of  coal  in  the  city  of  Elmira,  that  this  purpose  was 
known  to  the  plaintiff's  assignor,  the  Butler  Coal  Co.,  that  the 
contract  was  contrary  to  public  policy,  and  therefore  that  suit 
might  not  be  brought  upon  it.     The  Court  said : 

Every  producer  or  vendor  of  coal  or  other  commodity  has  the  right 
to  use  all  legitimate  efforts  to  obtain  the  best  price  for  the  article  in 
which  he  deals.  But  when  he  endeavors  to  artificially  enhance  prices 
by  suppressing  or  keeping  out  of  market  the  products  of  others,  and  to 
accomplish  that  purpose  by  means  of  contracts  binding  them  to  withhold 

^  This  case,  like  Ckapitt  v.  Brown,  noticed  above,  shows  that  the  courts  will  take 
notice  that  the  effect  of  a  combination  in  restraint  of  trade  is  to  reduce  the  prices  of 
articles  to  be  purchased,  as  well  as  to  increase  the  price  of  articles  to  be  sold  by  the 
combination. 

2  68  N.  Y.,  558,  decided  in  1877. 


TRADE   COMBINATIONS   AT    COMMON    LAW  457 

their  supplies,  such  arrangements  are  even  more  mischievous  than  com- 
binations not  to  sell  under  an  agreed  price.  CombiirtTtons  of  that 
character  have  been  held  to  be  against  pul)lic  policy  and  illegal.  .  .  . 
The  purpose  of  the  vendee  was  against  public  policy,  and  the  vendor 
knew  it.  This  brings  us  straight  to  the  question  whether  the  vendor 
delivering  goods  under  such  a  contract  can  recover  for  the  price.  I 
think  that  under  the  circumstances  of  the  present  case,  as  found  by  the 
referee,  he  cannot.  ...  He  had  a  right  to  dispose  of  his  goods,  and 
(under  certain  limitations)  the  vendor  of  goods  may  recover  for  their 
price,  notwithstanding  that  he  knows  that  the  vendee  intends  an  improper 
use  of  them,  so  long  as  he  does  nothing  to  aid  in  such  improper  use,  or 
in  the  illegal  plan  of  the  purchaser.  This  doctrine  is  established  by 
authority,  and  is  sufficiently  liberal  to  vendors.  But  —  and  this  is  a 
very  important  distinction  —  if  the  vendor  does  anything  beyond  mak- 
ing the  sale  to  aid  the  illegal  scheme  of  the  vendee,  he  renders  himself 
particeps  criminis  and  cannot  recover  for  the  price. 

So,  also,  it  has  been  held  that  a  loan  made  for  the  purpose  of 
aiding  in  a  combination  to  raise  the  price  of  a  particular  article, 
cannot  be  recovered.  In  the  case  of  Raymond  v.  Lcavitt} 
plaintiff  had  loaned  the  sum  of  $10,000  to  the  defendant  for 
the  purpose  of  controlling  the  wheat  market  at  Detroit,  with  a 
view  of  forcing  up  prices.  The  defendant,  who  was  to  give  the 
plaintiff  a  third  of  the  expected  profits,  was  at  all  events  to  repay 
the  $10,000,  with  or  without  profits.  In  rendering  its  decision, 
the  Court  said : 

The  object  of  the  arrangement  between  these  parties  was  to  force  a 
fictitious  and  unnatural  rise  in  the  wheat  market,  for  the  express  purpose 
of  getting  the  advantage  of  dealers  and  purchasers  whose  necessities 
compelled  them  to  buy,  and  necessarily  to  create  a  similar  difficulty  as 
to  all  persons  who  had  to  obtain  or  use  that  commodity,  which  is  an 
article  indispensable  to  every  family  in  the  coimtry.  .  .  .  We  shall 
decline  enforcing  such  contracts.  If  parties  see  fit  to  invest  money  in 
such  ventures,  they  must  get  it  back  by  some  other  than  legal  measures. 

Probably  the  strongest  case  of  all  is  that  of  Morris  Run  Coal 
Co.  V.  Barclay  Coal  Co?  This  was  an  action  upon  an  accepted 
draft  of  the  defendants  in  favor  of  the  plaintiffs.  The  draft 
was  made  in  execution  of  a  contract  between  five  coal  companies 

1  46  Mich.,  447,  decided  in  1881. 
^  68  Pa.  St.,  173,  decided  in  1871. 


458  TRUSTS,    POOLS   AND   CORPORATIONS 

for  a  sum  found  due  in  the  equalization  of  prices  under  the  con- 
tract. Provision  was  made  in  the  contract  for  a  committee  of 
three  to  take  charge  of  the  business  of  all  of  these  companies,  to 
decide  all  questions  and  to  appoint  the  general  sales-agent. 
Provision  was  also  made  for  the  mining  and  delivery  of  coal,  and 
for  its  sale  through  this  agent,  subject,  however,  to  the  restric- 
tion that  each  party  should  at  its  own  cost  deliver  its  propor- 
tion of  the  different  kinds  of  coal  in  the  different  markets,  at 
such  times  and  to  such  parties  as  the  committee  should  from 
time  to  time  direct.  The  committee  was  authorized  to  adjust 
the  price  of  coal  in  the  different  markets,  and  the  rates  of 
freight,  and  also  to  enter  into  such  an  agreement  with  the 
anthracite  coal  companies  as  should  promote  the  interest  of  the 
parties.  The  companies  were  allowed  to  sell  their  coal  them- 
selves, but  only  to  the  extent  of  their  proportion,  and  only  at 
the  prices  adjusted  by  the  committee.  In  answer  to  the  claim 
that  this  agreement  tended  to  establish  a  monopoly,  the  plain- 
tiff replied  that  the  true  object  of  it  was  to  lessen  expenses,  to 
improve  the  quality  of  the  coal  and  to  deliver  it  in  the  market 
in  the  best  order  to  the  consumer.  These  allegations  the  Court 
said  were  immaterial: 

Admitting  their  correctness,  it  does  not  follow  that  these  advantages 
redeem  the  contract  from  the  obnoxious  effects  so  strikingly  presented 
by  the  referee.  The  important  fact  is  that  these  companies  control  this 
immense  coal-field ;  that  it  is  the  great  source  of  supply  of  bituminous 
coal  to  the  state  of  New  York  and  large  territories  westward ;  that  by 
this  contract  they  control  the  price  of  coal  in  this  extensive  market,  and 
make  it  bring  sums  it  would  not  command  if  left  to  the  natural  laws  of 
trade  ;  that  it  concerns  an  article  of  prime  necessity  for  many  uses  ;  that 
its  operation  is  general  in  this  large  region,  and  affects  all  who  use  coal 
as  a  fuel ;  and  this  is  accomplished  by  a  combination  of  all  of  the  com- 
panies engaged  in  this  branch  of  business  in  the  large  region  where  they 
operate.  The  combination  is  wide  in  scope,  general  in  its  influence,  and 
injurious  in  effects.  These  being  its  features,  the  contract  is  against 
public  poUcy,  illegal,  and  therefore  void. 

Further  commenting  upon  the  agreement,  the  Court  said : 

The  effects  produced  on  the  pubhc  interest  lead  to  the  considera- 
tion of  another  feature  of  great  weight  in  determining  the  illegality  of 


TRADE    COMBINATIONS   AT   COMMON    LAW  459 

the  contract,  to  wit :  the  combination  resorted  to  by  these  five  com- 
panies. Singly,  each  might  have  suspended  deUveries  aniTsales  of  coal 
to  suit  its  own  interests,  and  might  have  raised  the  price,  even  though^ 
this  might  have  been  detrimental  to  the  public  interest.  There  is  a 
certain  freedom  which  must  be  allowed  to  every  one  in  the  manage- 
ment of  his  own  affairs.  When  competition  is  left  free,  individual  error 
or  folly  will  generally  find  a  correction  in  the  conduct  of  others ;  but 
here  is  a  combination  of  all  the  companies  operating  in  the  Blossburg  and 
Barclay  mining  regions  and  controlling  their  entire  productions.  .  .  . 
This  combination  has  a  power  in  its  confederative  form  which  no  indi- 
vidual action  can  confer.  The  public  interest  must  succumb  to  it,  for 
it  has  left  no  competition  free  to  correct  its  baleful  influence.  When 
the  supply  of  coal  is  suspended,  the  demand  for  it  becomes  importu- 
nate, and  prices  must  rise.  Or  if  the  supply  goes  forward,  the  price 
fixed  by  the  confederates  must  accompany  it.  .  .  .  Such  a  combina- 
tion is  more  than  a  contract ;  it  is  an  offence.  .  .  .  The  present  case 
is  free  of  difficulty,  the  money  represented  by  the  bill  arising  directly 
upon  the  contract  to  be  paid  by  one  party  to  another  party  to  the  con- 
tract in  execution  of  its  terms.  The  bill  itself  is  therefore  tainted  by 
the  illegality,  and  no  recovery  can  be  had  upon  it. 

While  the  courts  will  not  enforce  an  unlawful  agreement  or 
give  damages  for  the  non-execution  of  an  unlawful  agreement, 
it  does  not  by  any  means  follow  that  they  will  prevent  the 
execution  of  an  agreement  which  is  in  reasonable  restraint 
of  trade.  A  good  case  upon  this  point  is  that  of  the  Bohn 
Majiiifachtring  Co.  v.  Mollis}  The  plaintiff  was  a  manufac- 
turer and  vendor  of  lumber  and  other  building  material,  a  large 
and  valuable  part  of  his  trade  being  with  retail  lumber  dealers. 
The  defendant,  the  Northwestern  Lumbermen's  Association, 
was  a  voluntary  association  of  retail  lumber  dealers,  formed  to 
protect  its  members  against  sales  by  wholesale  dealers  and 
manufacturers  to  contractors  and  consumers.  The  method 
employed  by  the  association  was  to  demand  of  every  wholesale 
dealer  who  sold  directly  to  contractors  and  consumers  10  per 
cent  of  the  amount  of  such  sales,  and  to  notify  all  the  retail 
dealers  to  refrain  from  dealing  with  such  wholesale  dealer  until 
the  payment  was  made.     The  plaintiff  in  this  suit,  having  sold 

1  54  Minn.,  223,  decided  in  1893. 


46o  TRUSTS,    POOLS   AND    CORPORATIONS 

directly  to  consumers,  was  requested  to  pay  the  lo  per  cent  to 
the  association,  failing  which  payment  the  secretary  of  the 
association  threatened  to  send  to  the  other  retail  dealers  the 
notice  provided  for  in  the  agreement  of  the  association.  Plain- 
tiff demanded  an  injunction  to  restrain  the  issuing  of  these 
notices.  The  Court  refused  the  injunction  ;  it  held  that  the 
agreement  was  not  in  unreasonable  restraint  of  trade  or  unlaw- 
ful, and  recognized  that  it  was  a  general  rule  of  trade  in  every 
department  that  wholesale  dealers  should  refrain  from  seUing  at 
retail  within  the  territory  from  which  their  customers  obtain  their 
business. 

What  one  man  may  lawfully  do  singly  [says  the  Court],  two  or  more 
may  lawfully  agree  to  do  jointly ;  the  number  who  unite  to  do  the  act 
cannot  change  its  character  from  lawful  to  unlawful.  The  gist  of  a 
private  action  for  the  wrongful  acts  of  many  is  not  the  combination 
or  conspiracy,  but  the  damage  done  or  threatened  to  the  plaintiff  by 
the  acts  of  the  defendant.  If  the  act  be  unlawful,  the  combination 
of  many  to  permit  it  may  aggravate  the  injury,  but  cannot  change  the 
character  of  the  act.  In  a  few  cases  there  may  be  some  loose  remarks 
apparently  to  the  contrary,  but  they  evidently  have  their  origin  in  a 
confused  and  inaccurate  idea  of  the  law  of  criminal  conspiracy,  and 
in  failing  to  distinguish  between  an  unlawful  act  and  a  criminal  one. 
It  can  never  be  a  crime  to  combine  to  commit  a  lawful  act,  but  it 
may  be  a  crime  for  several  to  conspire  to  commit  an  unlawful  act 
which,  if  done  by  one  individual  alone,  although  unlawful,  would  not 
be  criminal.  Hence  the  fact  that  the  defendants  associated  themselves 
to  do  the  act  complained  of  is  wholly  immaterial  in  this  case. 

A  somewhat  similar  case  is  that  of  Cote  v.  Murphy?-  In 
this  case,  workmen  engaged  in  building  trades  had  combined  to 
advance  wages  by  reducing  the  hours  of  labor;  and  associations 
of  employers  in  such  trades  had  combined  and  agreed  not  to 
sell  materials  to  contractors  who  acceded  to  the  demands  of  the 
workmen,  and  to  induce  other  dealers  by  all  lawful  means  not 
to  furnish  such  materials.  The  Court  held  that  such  associations 
of  employers  were  not  liable  in  damages  for  conspiracy  to  con- 
tractors who,  by  reason  of  the  combination,  were  not  able  to 
procure  all  the  materials  they  could  dispose  of. 

^  159  Pa.  St.,  420,  decided  in  1894. 


TRADE    COMBINATIONS   AT   COMMON    LAW  461 

2.    Agreements  aiming  to  raise  Prices  are  ijiiMiNAL 

The  early  English  and  American  cases,  regarding  labor  as 
in  the  nature  of  a  commodity,  held  very  frequently  that  com- 
binations among  workingmen  for  the  purpose  of  raising  wages 
were,  even  if  unaccompanied  by  any  violence  or  other  unlawful 
acts,  criminal  conspiracies.  One  of  the  earliest  cases  in  this 
country  was  that  of  People  v.  Fisher}  In  this  case,  certain 
journeymen  shoemakers  had  combined  for  the  purpose  of  fixing 
the  wages  of  members  of  the  combination.  They  were  indicted 
under  a  provision  of  the  New  York  Revised  Statutes  which 
declared  that  if  two  or  more  persons  should  conspire  to  commit 
any  act  injurious  to  trade  or  commerce,  they  should  be  deemed 
guilty  of  a  misdemeanor.  This  provision  is  regarded  as  declara- 
tory of  the  common  law.  The  Court,  in  its  opinion,  declared 
that  a  combination  to  raise  wages  was  injurious  to  trade  or  com- 
merce, adding  : 

It  is  important  to  the  best  interest  of  society  that  the  price  of  labor 
be  left  to  regulate  itself,  or  rather  be  limited  by  the  demand  for  it. 
Combinations  and  confederacies  to  enhance  or  reduce  the  prices  of 
labor  or  of  any  articles  of  trade  or  commerce  are  injurious.  They  may 
be  oppressive  by  compelling  the  public  to  give  more  for  an  article  of 
necessity  or  of  convenience  than  it  is  worth,  or,  on  the  other  hand,  by 
compelling  the  labor  of  the  mechanic  for  less  than  its  value. 

It  is  only  fair  to  say  that  the  Court  was  influenced  in  its 
decision  by  the  fact  that  the  indicted  shoemakers  left  the 
employment  of  a  master  workman,  in  order  to  force  him  to 
discharge  one  who  had  formerly  been  a  member  of  the  shoe- 
makers' association,  but  who  had  refused  to  pay  the  penalty 
fixed  by  the  association  for  violation  of  the  agreement  not  to 
work  for  less  than  a  certain  sum.  It  will  be  seen,  therefore, 
that  in  this  particular  case  the  conspiracy  included  not  only  the 
combination  to  raise  prices,  but  also  something  in  the  nature  of 
a  boycott.     The  Court  remarked  : 

In  the  present  case  an  industrious  man  was  driven  out  of  employment 
by  the  unlawful  measures  pursued  by  the  defendants,  and  an  injury  done 

i  14  Wendell,  9,  decided  in  1835. 


462  TRUSTS,    POOLS   AND  CORPOIL\TIONS 

to  the  community  by  diminishing  the  quantity  of  productive  labor  and 
of  internal  trade.  .  .  .  He  had  a  right  to  work  for  what  he  pleased. 
His  employer  had  a  right  to  employ  him  for  such  price  as  they  could 
agree  upon.  The  interference  of  the  defendants  was  unlawful ;  its  ten- 
dency is  not  only  to  individual  oppression,  but  to  public  inconvenience 
and  embarrassment.     I  am  of  the  opinion  that  the  offence  is  indictable. 

In  commenting  upon  this  general  subject  of  labor  combina- 
tions, the  supreme  court  of  Pennsylvania,  in  the  case  of  Cote  v. 
Alurp/iy,  already  referred  to,  said  : 

The  fixed  theory  of  courts  and  legislators  .  .  .  was  that  the  price  of 
everything  ought  to  be,  and  in  the  absence  of  combinations,  necessarily 
would  be,  regulated  by  supply  and  demand.  The  first  to  deny  the  justice 
of  this  theory  and  to  break  away  from  it  was  labor ;  and  this  was  soon 
followed  by  .  .  .  legislation  .  .  .  relieving  workmen  of  the  penalties  of 
what  for  more  than  a  century  had  been  declared  unlawful  combinations 
or  conspiracies.^  Wages,  it  was  argued,  should  be  fixed  by  the  fair  pro- 
portion labor  had  contributed  in  production.  The  market  price  deter- 
mined by  supply  and  demand  might  or  might  not  be  fair  wages,  often 
was  not,  and,  as  long  as  workmen  were  not  free  by  combinations  to  insist 
upon  their  right  to  fair  wages,  oppression  by  capital,  or  which  is  the 
same  thing,  by  their  employers,  followed.  It  is  not  our  business  to  pass 
on  the  soundness  of  the  theories  which  prompt  the  enactment  of  statutes. 
One  thing,  however,  is  clear :  the  moment  the  legislature  relieved  one 
and  by  far  the  larger  number  \_s2c']  of  the  citizens  of  the  commonwealth 
from  the  common-law  prohibitions  against  combinations  to  raise  the 
price  of  labor,  and  by  a  combination  the  price  was  raised,  down  went 
the  foundation  on  which  common-law  conspiracy  was  based,  as  to  that 
particular  subject. 

The  logical  consequence  of  this  change  in  the  law  was,  in 
the  opinion  of  the  Court,  that,  after  employees  had  combined  to 
raise  wages,  any  combination  made  by  employers  against  raising 
wages  was  not  an  unlawful  conspiracy,  inasmuch  as  the  pur- 
pose of  the  employers  was,  not  to  interfere  with  the  price  of 
labor  as  determined  by  the  common-law  theory,  but  to  defend 
themselves  against  a  demand  made  altogether  regardless  of  the 
price  as  regulated  by  the  supply. 

^  Thus,  in  New  York  it  is  provided  that  it  shall  not  be  a  criminal  conspiracy  for 
persons  to  combine  for  the  purpose  of  advancing  or  maintaining  wages.  —  Laws  of 
1870,  c.  19. 


TRADE   COMBINATIONS   AT   COMMON    LAW  463 

A  perusal  of  the  later  decisions  upon  this  subject^  sometimes 
made  as  a  result  of  a  change  in  the  ideas  of  the  judges,  some- 
times made  as  a  result  of  specific  statutes  passed  upon  the  sub- 
ject, must  lead  to  the  conclusion  that  at  the  present  time  a 
combination  of  laborers  for  the  jjurpose  of  raising  wages,  if  un- 
accompanied by  any  unlawful  act,  — as,  for  example,  a  boycott 
or  violence,  —  is  not  to  be  regarded  as  a  criminal  conspiracy. 
One  of  the  latest  cases  upon  the  subject  is  The  Longshore 
Printing  Co.  v.  Howell}  In  this  case  the  Court  held  that  it 
was  not  unlawful  for  a  union  to  make  provision  in  its  by-laws 
for  a  scale  of  wages,  or  for  limiting  the  number  of  apprentices ; 
nor  was  it  unlawful  for  several  or  many  employees  to  agree 
among  themselves  to  quit  their  employer,  in  order  by  so  doing 
to  induce  him  to  confine  his  employment  to  certain  kinds  of 
labor.^ 

But  while  the  law  at  the  present  time  is  that  combinations 
of  laborers  to  raise  wages,  when  unaccompanied  by  any  unlawful 
acts,  are  not  criminal  conspiracies,  it  cannot  be  said  that  the  old 
common  law  generally  has  been  thus  changed.  That  is,  not- 
withstanding the  change  made  in  favor  of  labor,  it  is  still  a 
crime  to  combine  for  the  purpose  of  raising  the  price  of  com- 
modities. One  of  the  latest  cases  decided  upon  this  point  is 
People  V.  Sheldon?  In  this  case,  certain  coal  dealers  in  the 
city  of  Lockport  entered  into  an  agreement  to  organize  a  coal 
exchange.  The  object  of  this  exchange  was  to  secure  a  general 
supervision  and  protection  of  the  interests  of  retail  dealers  in 
coal  and  similar  commodities.  It  was  made  the  duty  of  mem- 
bers strictly  to  obey  all  the  provisions  of  the  constitution,  by- 
laws and  resolutions  of  the  exchange.  Any  member  guilty  of 
violating  any  provision  of  the  by-laws,  or  of  conduct  unbecom- 
ing a  member,  or  of  giving  short  weight  or  overweight,  was 
liable  to  forfeit  his  membership.  The  agreement  further  de- 
clared that  the  retail  price  of  coal  should  as  far  as  practicable 

^  26  Oregon,  527,  decided  in  1894. 

2  The  common  law  was  the  same  in  the  case  of  a  combination  of  employers  to 
reduce  wages.  Such  a  combination  was  a  criminal  conspiracy.  Cotn.  ex  rel.  Ckeio 
V.  Carlisle,  Brightley's  Report,  Pa.,  36. 

^  139  N.  Y.,  251,  decided  in  1S93. 


464  TRUSTS,    POOLS   AND    CORPORATIONS 

be  kept  uniform  ;  and  that  no  price  should  be  made  at  any  time 
which  should  exceed  a  fair  and  reasonable  advance  over  whole- 
sale rates,  or  which  should  be  higher  than  the  current  price  at 
Rochester  or  Buffalo,  figured  upon  corresponding  freight  tariffs ; 
and  that  at  no  time  should  the  price  of  coal  at  retail  exceed  by 
more  than  one  dollar  the  wholesale  cost,  except  by  the  unani- 
mous vote  of  all  the  members  of  the  exchange.  A  certain 
member  of  the  exchange  was  indicted,  on  the  ground  that  this 
agreement  constituted  an  unlawful  conspiracy  to  increase  the 
price  of  coal  at  retail  in  the  city  of  Lockport,  and  that  in  pur- 
suance of  it  the  defendant  and  other  members  of  the  exchange 
elected  officers  and  by  resolution  increased  the  price  of  coal 
seventy-five  cents  per  ton.  The  indictment  was  found  under 
section  168  of  the  Penal  Code,  which  is  a  reenactment  of  the 
provision  of  the  Revised  Statutes,  making  it  a  misdemeanor  for 
any  two  or  more  persons  to  conspire  "  to  commit  an  act  injuri- 
ous to  the  public  health,  to  public  morals  or  to  trade  or  com- 
merce." The  trial  judge  submitted  the  case  to  the  jury  upon 
the  proposition  that,  if  the  defendants  entered  into  the  organi- 
zation agreement  for  the  purpose  of  controlling  the  price  of  coal 
and  managing  the  business  of  the  sale  of  coal  so  as  to  prevent 
competition  in  price  between  the  members  of  the  exchange,  the 
agreement  was  illegal;  and  that  if  the  jury  found  that  this  was 
their  intent,  and  that  the  price  of  coal  was  raised  in  pursuance 
of  the  agreement  to  effect  this  object,  the  crime  of  conspiracy 
was  established. 

The  Court  of  Appeals,  in  deciding  upon  the  propriety  of  this 
charge,  said : 

The  question  here  does  not,  we  think,  turn  on  the  point  whether  the 
agreement  between  the  retail  dealers  in  coal  did,  as  a  matter  of  fact, 
result  in  injury  to  the  public,  or  to  the  community  in  Lockport.  The 
question  is  :  Was  the  agreement,  in  view  of  what  might  have  been  done 
under  it,  and  the  fact  that  it  was  an  agreement  the  effect  of  which  was 
to  prevent  competition  among  the  coal  dealers,  one  upon  which  the  law 
affixes  the  brand  of  condemnation?  It  has  hitherto  been  an  accepted 
maxim  in  political  economy  that  "competition  is  the  life  of  trade."  The 
courts  have  acted  upon  and  adopted  this  maxim  in  passing  upon  the 
validity  of  agreements  the  design  of  which  was  to  prevent  competition 


TRADE   COMBINATIONS   AT   COMMON    LAW         465 

in  trade,  and  have  held  such  agreements  to  be  invaUd.  .  ..*♦  The  organ- 
ization was  a  carefully  devised  scheme  to  prevent  competition  in  the 
price  of  coal  among  the  retail  dealers  ;  and  the  moral  and  material  power 
of  the  combination  afforded  a  reasonable  guaranty  that  others  would  not 
engage  in  the  business  at  Lockport  except  in  conformity  with  the  rules 
of  the  exchange.  .  .  .  The  gravamen  of  the  offence  of  conspiracy  is 
the  combination.  Agreements  to  prevent  competition  in  trade  are  in 
contemplation  of  law  injurious  to  trade  because  they  are  liable  to  be 
injuriously  used.  ...  If  agreements  and  combinations  to  prevent  com- 
petition in  prices  are  or  may  be  hurtful  to  trade,  the  only  sure  remedy  is 
to  prohibit  all  agreements  of  that  character.  If  the  validity  of  such  an 
agreement  was  made  to  depend  upon  actual  proof  of  public  prejudice  or 
injury,  it  would  be  very  difficult  in  any  case  to  establish  the  invalidity, 
although  the  moral  evidence  might  be  very  convincing.  We  are  of 
opinion  that  the  principle  upon  which  the  case  was  submitted  to  the  jury 
is  sanctioned  by  the  decisions  in  this  state,  and  that  the  jury  were  prop- 
erly instructed  that  if  the  purpose  of  the  agreement  was  to  prevent 
competition  in  the  price  of  coal  between  the  retail  dealers,  it  was  illegal 
and  justified  the  conviction  of  the  defendant. 

Finally,  it  has  been  held  that  corporations  may  be  guilty  of 
the  crime  of  conspiracy,  and  that  they  are  so  guilty  when  they 
refuse  to  sell  their  products  to  dealers  handling  the  products  of 
rival  companies.^ 

3.    "  Trust  "  Agreements  justify  Forfeiture  of  Corporate 

Charters 

The  impossibility,  under  the  existing  law,  of  making  contracts 
in  restraint  of  trade  which  would  be  enforced  by  the  courts,  and 
the  danger  that  such  agreements  would  be  followed  by  punish- 
ment, led  to  the  formation  of  agreements  which  took  absolutely 
out  of  the  power  of  the  original  owners  of  a  business  all  con- 
trol over  it.  These  agreements,  commonly  known  as  trust 
agreements,  provided  for  trustees  who  could  operate  a  number 

^  People  V.  Duke  et  al.,  N.  Y.  La-u  Journal,  Jan.  23,  1897.  I'  would  seem,  how- 
ever, that  rebates  given  on  condition  that  the  person  receiving  the  rebate  shall  deal 
exclusively  with  the  person  giving  the  rebate  are  perfectly  legal.  Mogul  Steamship 
Co.  V.  McGregor,  H.  L,  App.  Cases,  1892,  p.  25  ;  Nat.  Distilling  Co.  v.  Cream  City 
Importing  Co.,  86  Wis.,  352  ;  Olmstead  v.  Distilling  and  Cattle  Feeding  Co.,  77  Fed. 
Rep.,  265. 


466  TRUSTS,    POOLS   AND    CORPORATIONS 

of  different  enterprises  in  accordance  with  their  own  ideas  of 
what  was  proper,  and  who  could  thus  absolutely  prevent  com- 
petition between  the  parties  to  the  agreements.  Such  an  agree- 
ment usually,  but  not  universally,  provided  for  the  formation  of 
a  corporation  out  of  a  partnership  wherever  a  business  had  been 
conducted  under  the  latter  form.  In  organizing  the  trust  the 
stockholders  in  these  corporations  exchanged  their  stock  for 
trust  certificates  issued  by  trustees,  elected  by  the  persons  in 
interest.  The  trustees,  it  was  believed,  would  thus  become  the 
only  stockholders  known  to  the  law,  and  would  therefore  have 
the  power  of  controlling  the  operations  of  the  corporations 
whose  stockholders  had  become  parties  to  the  trust  agreement. 
In  other  words,  the  attempt  was  made  to  prevent  competition  by 
means  of  a  federation  of  corporations. 

This  method  was  very  commonly  employed  in  this  country  for 
almost  a  quarter  of  a  century  without  being  opposed  by  the 
public  authorities.  In  i8S8,  however,  attention  was  directed  to 
a  trust  agreement  in  the  state  of  New  York,  and  the  attorney- 
general  decided  to  bring  an  action  in  the  nature  of  a  quo  war- 
ranto  to  forfeit  the  charter  of  a  corporation  whose  stockholders 
had  participated  in  its  formation.  The  matter  was  decided  in 
the  case  of  People  v.  T/ie  NortJi  River  Sugar  Refijiing  Co.} 
and  this  decision  was  followed  by  the  supreme  court  of  Ohio  in 
State  V,  Standard  Oil  Co?  In  the  New  York  case  the  action 
of  the  stockholders,  even  without  any  formal  action  upon  the 
part  of  the  corporation,  was  held  to  be  corporate  action,  and  to 
be  contrary  to  public  policy ;  the  charter  of  the  corporation 
itself  was  therefore  forfeited.  Judge  Finch,  who  delivered  the 
opinion  of  the  Court,  said : 

I  think  there  may  be  actual  corporate  conduct  which  is  not  formal 
corporate  action  ;  and  where  that  conduct  is  directed  or  produced  by 
the  whole  body  both  of  officers  and  stockholders,  by  every  living  instru- 
mentality which  can  possess  and  wield  the  corporate  franchise,  that 
conduct  is  of  a  corporate  character,  and  if  illegal  and  injurious  may 
deserve  and  receive  the  penalty  of  dissolution.  .  .  .  The  directors  of  a 
corporation,  its  authorized  and  active  agency,  may  see  the  stockholders 

^  121  N.  Y.,  5S2,  decided  in  1890. 
249  Ohio  St.,  137,  decided  in  1892. 


TRADE   COMBINATIONS   AT  COMMON    LAW         467 

perverting  its  normal  purposes  by  handing  it  over  boundTTfid  helpless  to 
an  irresponsible  and  foreign  authority,  and  omit  all  action  which  they 
ought  to  take,  offer  no  resistance,  make  no  protest,  but  apparently 
acquiesce  as  directors  in  the  wrong  which  as  stockholders  they  have 
themselves  helped  to  commit.  That  is  corporate  conduct,  though  there 
may  be  utter  absence  of  directors'  resolutions.  .  .  .  The  abstract  idea 
of  a  corporation,  the  legal  entity,  the  impalpable  and  intangible  creation 
of  human  thought,  is  itself  a  fiction  and  has  been  appropriately  described 
as  a  figure  of  speech.  It  serves  very  well  to  designate  in  our  minds  the 
collective  action  and  agency  of  many  individuals  as  permitted  by  the 
law,  and  the  substantial  inquiry  always  is  :  What,  in  a  given  case,  has 
been  that  collective  action  and  agency?  As  between  the  corporation 
and  those  with  whom  it  deals,  the  manner  of  its  exercise  usually  is  mate- 
rial. But  as  between  it  and  the  state  the  substantial  inquiry  is  only  what 
that  collective  action  and  agency  has  done,  and  what  it  has  in  fact 
accomplished  ;  what  has  seemed  to  be  its  effective  work  ;  what  has  been 
its  conduct?  It  ought  not  to  be  otherwise.  The  state  gave  the  fran- 
chise, the  charter,  not  to  the  impalpable,  intangible  and  almost  nebulous 
fiction  of  our  thoughts,  but  to  the  corporators,  the  individuals,  the  acting 
and  living  men,  to  be  used  by  them,  to  redound  to  their  benefit,  to 
strengthen  their  hands  and  add  energy  to  their  capital.  If  it  is  taken 
away,  it  is  taken  from  them  as  individuals  and  corporators,  and  the  legal 
fiction  disappears.  The  benefit  is  theirs ;  the  punishment  is  theirs ; 
and  both  must  attend  and  depend  upon  their  conduct.  And  when  they 
all  act  collectively  as  an  aggregate  body  without  the  least  exception,  and 
so  acting  reach  results  and  accomplish  purposes  clearly  corporate  in 
their  character,  and  affecting  the  vitality,  the  independence,  the  utility 
of  the  corporation  itself,  we  cannot  hesitate  to  conclude  that  there  has 
been  corporate  conduct  which  the  state  may  review  and  not  be  defeated 
by  the  assumed  innocence  of  a  convenient  fiction. 

In  the  Ohio  case  the  reasoning  on  this  head  was  very  similar. ^ 
In  both  of  these  cases,  however,  the  judges  felt  called  upon  to 
consider  the  further  question  whether  the  act  which  had  thus 

^  Judge  Marshall  said:  "The  general  proposition  that  a  corporation  is  to  be 
regarded  as  a  legal  entity  existing  separate  and  apart  from  the  natural  persons 
composing  it  is  not  disputed.  But  that  the  statement  is  a  mere  fiction  existing  only 
in  idea  is  well  understood  and  not  controverted  by  any  one  who  pretends  to  accurate 
knowledge  on  the  subject.  .  .  .  Now,  so  long  as  a  proper  use  is  made  of  the  fiction 
that  a  corporation  is  an  entity  apart  from  its  shareholders,  it  is  harmless,  and,  because 
convenient,  should  not  be  called  in  question  ;  but  where  it  is  urged  to  an  end  sub- 
versive of  its  policy,  or  such  is  the  issue,  the  fiction  must  be  ignored  and  the  question 


468  TRUSTS,    POOLS   AND   CORPORATIONS 

taken  the  form  of  a  corporate  act  was  sufficiently  injurious  and 
contrary  to  public  policy  to  justify  the  forfeiture  of  the  charter. 
Here  the  decisions  were  somewhat  divergent.  In  New  York 
the  Court  held  that  the  act  of  which  the  corporation  had  been 
guilty  was  in  excess  of  its  powers,  and  that  the  charter,  there- 
fore, was  forfeited.  The  combination  of  sugar  refineries  was 
declared  to  partake  of  the  nature  of  a  partnership  of  corpora- 
tions, and  hence  to  be  in  violation  of  law.  There  was  in  the 
opinion  a  dictum  as  to  the  injurious  effects  of  monopolies  upon 
the  pubhc ;  but  the  Court  in  terms  declined 

to  advance  into  the  wider  discussion  over  monopolies  and  competition 
and  restraint  of  trade,  and  the  problems  of  political  economy.  .  .  . 
Without  either  approval  or  disapproval  of  the  views  expressed  upon 
that  branch  of  the  case  by  the  courts  below,  we  are  enabled  to  decide 
that  in  this  state  there  can  be  no  partnerships  of  separate  and  inde- 
pendent corporations,  whether  directly  or  indirectly,  through  the 
medium  of  the  trust ;  no  substantial  consolidations  which  avoid  and 
disregard  the  statutory  permissions  and  restraints ;  but  that  manufac- 
turing corporations  must  be  and  remain  several,  as  they  were  created, 
or  one  under  the  statute.^ 

In  the  dictum  with  regard  to  monopolies,  there  were  several 
very  interesting  statements,  indicative  of  the  opinion  of  the 
Court  as  to  the  public  policy  of  permitting  combinations  whose 

determined  whether  the  act  in  question,  though  done  by  shareholders,  that  is  to  say, 
by  the  persons  united  in  one  body,  was  done  simply  as  individuals  and  with  respect 
to  their  individual  interests  as  shareholders,  or  was  done  ostensibly  as  such  but,  as  a 
matter  of  fact,  to  control  the  corporation  and  affect  the  transaction  of  its  business  in 
the  same  manner  as  if  the  act  had  been  clothed  with  all  the  formalities  of  a  corporate 
act.  This  must  be  so  because,  the  stockholders  having  a  dual  capacity  and  capable 
of  acting  in  either,  and  a  possible  interest  to  conceal  their  character  when  acting  in 
their  corporate  capacity,  the  absence  of  the  formal  evidence  of  the  character  of  the 
act  cannot  preclude  judicial  inquiry  on  the  subject.  If  it  were  otherwise,  then  in  one 
department  of  the  law  fraud  would  enjoy  an  immunity  awarded  to  it  in  no  other." 

1  The  statutes  here  referred  to  permitted  the  consolidation  of  manufacturing  cor- 
porations, and  the  Court  in  a  previous  part  of  the  opinion  seemed  to  intimate  that  a 
consoHdation  under  the  statute  would  have  been  perfectly  proper,  inasmuch  as  "the 
resultant  combination  would  itself  be  a  corporation  deriving  its  existence  from  the 
state,  owing  duties  and  obligations  to  the  state,  and  subject  to  the  control  and  super- 
vision of  the  state,  and  not  [as  in  the  case  presented]  an  unincorporated  board,  a 
colossal  and  gigantic  partnership,  having  no  corporate  functions  and  owing  no 
corporate  allegiance." 


TRADE    COMBINATIONS   AT   COMMON    LAW  469 

purpose  or  effect  is  to  promote  monopolies.  The  piiblic  interest 
which  corporate  grants  are  always  assumed  to  subserve  is  most 
unfavorably  affected,  said  Judge  Finch, 

when  beyond  their  own  several  aggregations  of  capital  they  compact 
them  all  into  one  combination  which  stands  outside  of  the  ward  of 
the  state,  which  dominates  the  range  of  an  entire  industry  and  puts 
upon  the  market  a  capital  stock  proudly  defiant  of  actual  values  and 
capable  of  an  unlimited  expansion.  It  is  not  a  sufficient  answer  to 
say  that  similar  results  may  be  lawfully  accomplished ;  that  an  indi- 
vidual having  the  necessary  wealth  might  have  bought  all  of  these 
refineries,  manned  them  with  his  own  chosen  agents,  and  managed 
them  as  a  group  at  his  sovereign  will ;  for  it  is  one  thing  for  the  state 
to  respect  the  rights  of  ownership  and  protect  them  out  of  regard  to 
the  business  freedom  of  the  citizen,  and  quite  another  thing  to  add  to 
that  possibility  a  further  extension  of  those  consequences  by  creating 
artificial  persons  to  aid  in  producing  such  aggregations.  The  indi- 
viduals are  few  who  hold  in  possession  such  enormous  wealth,  and 
fewer  still  who  peril  it  all  in  a  manufacturing  enterprise ;  but  if  cor- 
porations can  combine  and  mass  their  forces  in  a  solid  trust  or  part- 
nership with  little  added  risk  to  the  capital  already  embarked,  without 
limit  to  the  magnitude  of  the  aggregation,  a  tempting  and  easy  road 
is  open  to  enormous  combinations  vastly  exceeding  in  number  and  in 
strength  and  in  their  power  over  industry  any  possibilities  of  individual 
ownership  ;  and  the  state,  by  the  creation  of  the  artificial  persons  con- 
stituting the  elements  of  the  combination  and  failing  to  limit  and 
restrain  their  powers,  becomes  itself  the  responsible  creator,  the  vol- 
untary cause  of  an  aggregation  of  capital  which  it  simply  endures  in 
the  individual  as  the  product  of  his  free  agency.  What  it  may  bear  is 
one  thing ;  what  it  should  cause  and  create  is  quite  another. 

In  the  Ohio  case  the  Court  declared  the  action  of  the  corpo- 
rations which  formed  the  trust  to  be  void,  as  contrary  to  public 
policy,  on  the  ground  that  the  attempt  was  made  to  form  a 
monopoly.     The  judge  said  that  the  object  of  the  agreement 

was  to  establish  a  virtual  monopoly  of  the  business  of  producing 
petroleum  and  of  manufacturing,  refining  and  dealing  in  it  and  all  its 
products  throughout  the  entire  country,  and  by  which  it  might  not 
merely  control  the  production,  but  the  price,  at  its  pleasure.  All  such 
associations   are   contrary  to  the   policy  of  our  state   and  void.  .  .  . 


470  TRUSTS,    POOLS   AND    CORPORATIONS 

Much  has  been  said  in  favor  of  the  object  of  the  Standard  Oil  Trust 
and  what  it  has  accomplished.  It  may  be  true  that  it  has  improved 
the  quality  and  cheapened  the  cost  of  petroleum  and  its  products  to 
the  consumer.  But  such  is  not  one  of  the  usual  or  general  results  of 
a  monopoly,  and  it  is  the  policy  of  the  law  to  regard  not  what  may, 
but  what  usually  happens.  Experience  shows  that  it  is  not  wise  to  trust 
human  cupidity  where  it  has  the  opportunity  to  aggrandize  itself  at  the 
expense  of  others.  .  .  .  Monopolies  have  always  been  regarded  as  con- 
trary to  the  spirit  and  policy  of  the  law.  The  objections  are  stated  in 
"The  Case  on  Monopolies,"  Darcy  v.  Allein,  Coke,  Pt.  XI,  84  b.  They 
are  these  :  (i)  "That  the  price  of  the  same  commodity  will  be  raised, 
for  he  who  has  the  sole  selling  of  any  commodity  may  well  make  the 
price  as  he  pleases  "  ;  (2)  "The  Incident  to  a  monopoly  is  that  after  the 
monopoly  is  granted,  the  commodity  is  not  so  good  and  merchantable 
as  it  was  before,  for  the  patentee,  having  the  sole  trade,  regards  only 
his  private  benefit  and  not  the  commonwealth";  (3)  "It  tends  to  the 
impoverishment  of  divers  artificers  and  others  who  before,  by  the  labor 
of  their  hands  in  their  art  or  trade,  had  maintained  themselves  and  their 
families,  who  will  now  of  necessity  be  constrained  to  live  in  idleness  and 
beggary."  The  third  objection,  though  frequently  overlooked,  is  none 
the  less  important.  A  society  in  which  a  few  men  are  the  employers 
and  a  great  body  are  merely  employees  or  servants  is  not  the  most 
desirable  in  a  republic  ;  and  it  should  be  as  much  the  policy  of  the  laws 
to  multiply  the  numbers  engaged  in  independent  pursuits,  or  in  the 
profits  of  production,  as  to  cheapen  the  price  to  the  consumer.  Such 
policy  would  tend  to  an  equality  of  fortunes  among  its  citizens,  thought 
to  be  so  desirable  in  a  republic,  and  lessen  the  amount  of  pauperism  and 
crime.  It  is  true  that  in  the  case  just  cited  the  monopoly  had  been 
created  by  letters  patent ;  but  the  objections  lie  not  to  the  manner  in 
which  the  monopoly  is  created.  The  effect  on  industrial  liberty  and  the 
price  of  commodities  will  be  the  same,  whether  created  by  patent  or  by 
an  extensive  combination  among  those  engaged  in  similar  industries 
controlled  by  one  management.  By  the  invariable  laws  of  human 
nature,  competition  will  be  excluded  and  prices  controlled  in  the  interest 
of  those  connected  with  the  combination  or  trust.^ 

^  A  similar  decision  was  made  by  the  supreme  court  of  Nebraska  in  State  v. 
Nebraska  Distilling  Co.,  29  Neb.,  700,  decided  in  1890.  See  also  Mallory  v.  Han- 
aner  Oil  Wo7-ks,  8  S.  W.  Rep.  (Tenn.,  1888),  where  suit  was  brought  against  trus- 
tees of  a  trust  agreement  by  a  corporation  which  was  a  party  to  such  agreement  to 
recover  possession  of  its  property.  Judgment  was  given  in  favor  of  the  plaintiff  on 
the  ground  that  the  corporation  could  not  enter  into  such  an  agreement,  which  the 
Court  considered  to  be  a  partnership  of  corporations. 


TRADE    COMBINATIONS   AT   COMMON    LAW  471 

4.    Are  Corporations  for  Purposes  of  MonopTTTy  Illegal? 

The  effect  of  the  foregoing  and  similar  decisions  was  that 
any  persons  who  intended  to  form  a  combination  for  the  pur- 
pose of  limiting  competition  were  obliged  to  seek  a  substitute 
for  the  trust  agreement.  As  a  general  thing  they  effected  an 
organization  in  the  shape  of  a  large  corporation,  since,  as  has 
been  shown,  the  New  York  Court  of  Appeals  had  appeared  to 
regard  this  as  a  legal  method  of  forming  a  combination.  The 
courts  were  soon  required  to  decide  upon  the  legality  of  such 
action.  The  first  case  that  came  up  was  that  of  People  v. 
The  Chieago  Gas  Trust  Co}  A  gas  trust  company,  as  it  was 
called,  had  been  formed,  in  whose  certificate  of  incorporation 
the  purposes  of  the  corporation  were  stated  to  be  the  manufac- 
ture of  gas  and  the  purchase,  holding  and  selling  of  stocks  in 
other  gas  and  electric  companies  in  Chicago  or  elsewhere  in 
Illinois.  Quo  warranto  was  brought  against  the  corporation  to 
obtain  judgment  of  ouster  against  its  use  of  the  franchise  to 
purchase  and  hold  or  sell  the  capital  stock  of  other  companies. 
It  was  clearly  admitted  on  both  sides  that  the  Court  was  not 
precluded  from  examining  into  the  legality  of  the  exercise  of 
this  franchise  by  the  fact  that  the  certificate  of  incorporation 
had  been  approved  and  filed  with  the  proper  executive  officers 
of  the  state.  The  general  incorporation  act  of  the  state  per- 
mitted the  formation  of  corporations  in  the  manner  provided  by 
it  for  any  lawful  purpose.  The  question  which  arose  was,  there- 
fore, whether  the  corporation  in  question  had  been  formed  for 
a  lawful  purpose. 

In  answering  this  question  the  Court  found  that  one  result  of 
the  exercise  of  this  franchise  by  the  Chicago  Gas  Trust  Company 
would  be  that  it  could  control  the  four  other  companies  in 
Chicago.  The  control  of  these  four  companies,  it  was  thought, 
would  suppress  competition  among  them,  and  thus  build  up  a 
virtual  monopoly  in  the  manufacture  and  sale  of  gas.  The  Court 
said  : 

Whatever  tends  to  prevent  competition   between   those  engaged   in  a 
public   employment  or   business   impressed  with   a  public  character  is 

1  130  111.,  268,  decided  in  1889. 


472  TRUSTS,    POOLS   AND    CORPORATIONS 

opposed  to  public  policy,  and  therefore  unlawful.  Whatever  tends  to 
create  a  monopoly  is  unlawful,  as  being  contrary  to  public  policy. 

It  therefore  held  that 

if  contracts  and  grants  whose  tendency  is  to  create  monopolies  are  void 
at  common  law,  then  where  a  corporation  is  organized  under  a  general 
statute,  a  provision  in  the  declaration  of  its  corporate  purposes,  the 
necessary  effect  of  which  is  the  creation  of  a  monopoly,  will  also  be  void. 

Further  on  in  the  opinion  it  is  stated  : 

To  create  one  corporation  for  the  express  purpose  of  enabling  it  to  con- 
trol all  the  corporations  engaged  in  a  certain  kind  of  business,  and 
particularly  a  business  of  a  public  character,  is  not  only  opposed  to  the 
public  policy  of  the  state,  but  is  in  contravention  of  the  spirit,  if  not  the 
letter,  of  the  constitution. 

The  Court  also  cited  with  approval  the  following  views 
expressed  by  the  supreme  court  of  Georgia  in  the  case  of 
Central  Railroad  Co.  v.  Collins} 

All  experience  has  shown  that  large  accumulations  of  property  in 
hands  likely  to  keep  it  intact  for  a  long  period  are  dangerous  to  the 
public  weal.  Having  perpetual  succession,  any  kind  of  a  corporation 
has  peculiar  facilities  for  such  accumulations,  and  most  governments  have 
found  it  necessary  to  exercise  great  caution  in  their  grants  of  corporate 
powers.  Even  religious  corporations  professing,  and  in  the  main  truly, 
nothing  but  the  general  good,  have  proven  obnoxious  to  this  objection, 
so  that  in  England  it  was  long  ago  found  necessary  to  restrict  them  in 
their  powers  of  acquiring  real  estate.  Freed  as  such  bodies  are  from  the 
sure  bound  to  the  schemes  of  individuals,  the  grave,  they  are  able  to 
add  field  to  field  and  power  to  power  until  they  become  entirely  too 
strong  for  that  society  which  is  made  up  of  those  whose  plans  are  limited 
by  a  single  life. 

For  these  reasons  judgment  of  ouster  was  issued  against  the 
Chicago  Gas  Trust  Company,  as  to  the  exercise  of  the  franchise 
of  purchasing  the  stocks  in  other  gas  companies. 

All  the  cases  thus  far  considered  certainly  give  evidence  that 
the  courts  of  this  country  regard  any  combination,  whatever 
form  it  may  take,  whose  tendency  or  whose  purpose  is  to  form 
a  monopoly,  as  contrary  to  pubHc  policy  and  illegal  at  common 

^  40  Ga.,  582,  decided  in  1869. 


TRADE    COMBINATIONS   AT   COMMON    LAW  473 

law  ;  but  none  of  them,  not  even  the  last,  distinctly  declares 
unlawful  the  formation  of  a  corporation  whose  purpose  or  whose 
effect  is  to  promote  monopoly.  This  question  it  remained  for 
the  supreme  court  of  Illinois  to  consider  in  the  case  of  the 
Distilling  &  Cattle  Feeding  Co.  v.  The  People} 

In  view  of  the  decisions  which  the  courts  were  almost  univer- 
sally rendering  as  to  the  illegality  of  trust  agreements,  the  holders 
of  trust  certificates  in  the  Distillers'  &  Cattle  Feeders'  Trust, 
commonly  called  The  Whiskey  Trust,  had  in  February,  1890, 
adopted  a  recommendation  of  the  trustees  to  form  a  corporation 
with  a  capital  stock  of  $35,000,000.  The  corporation  was  there- 
after organized.  The  trustees  of  the  former  trust  subscribed 
for  all  the  stock  of  the  new  corporation  and  elected  themselves 
its  first  directors.  They,  or  so  many  of  them  as  were  necessary 
to  constitute  a  majority  of  the  directors  of  each  of  the  corpora- 
tions composing  the  trust,  also  ordered  a  conveyance  of  all  the 
property  which  those  corporations  held,  to  the  newly  formed 
corporation  ;  and  as  directors  of  these  corporations,  they  exe- 
cuted to  the  Distilling  &  Cattle  Feeding  Company  a  transfer  of 
all  of  the  property  of  these  corporations,  and  surrendered  to  the 
holders  of  the  trust  certificates  the  shares  of  stock  in  the  newly 
formed  corporation  in  return  for*the  trust  certificates.  The  new 
corporation  subsequently  purchased  the  property  and  business 
■  of  other  corporations  not  parties  to  the  former  trust  agreement. 
Suit  was  brought  against  the  new  corporation,  and  judgment  of 
ouster  from  its  franchise  was  demanded,  on  the  ground  that  it 
had  created  a  monopoly  in  the  manufacture  and  output  of  dis- 
tillery products,  and  secured  such  control  over  the  consumers 
thereof  as  to  destroy  all  competition  in  the  manufacture  and  sale 
of  such  products  throughout  the  United  States. 

The  Court,  in  rendering  its  opinion,  said  : 

There  can  be  no  doubt,  we  think,  that  the  Distillers'  &  Cattle  Feeders' 
Trust,  which  preceded  the  incorporation  of  the  defendant,  was  an  organ- 
ization which  contravened  well-established  principles  of  public  policy, 
and  that  it  was  therefore  illegal.  [The  new  corporation  succeeded]  to 
the  trust,  and  its  operations  are  to  be  carried  on  in  the  same  way,  for 
the  same  purposes  and  by  the  same  agencies  as  before.  The  trust  then 
1  156  111.,  448,  decided  in  1895. 


474  TRUSTS,    POOLS   AND    CORPORATIONS 

being  repugnant  to  public  policy  and  illegal,  it  is  impossible  to  see  why 
the  same  is  not  true  of  the  corporation  which  succeeds  to  it  and  takes 
its  place.  The  control  exercised  over  the  distillery  business  of  the 
country  —  over  production  and  prices  —  and  the  virtual  monopoly 
formerly  held  by  the  trust  are  in  no  degree  changed  or  relaxed,  but  the 
method  and  purposes  of  the  trust  are  perpetuated  and  carried  out  with 
the  same  persistence  and  vigor  as  before  the  organization  of  the  corpo- 
ration. There  is  no  magic  in  a  corporate  organization  which  can  purge 
the  trust  scheme  of  its  illegality,  and  it  remains  as  essentially  opposed  to 
the  principles  of  sound  public  policy  as  when  the  trust  was  in  existence. 
It  was  illegal  before  and  is  illegal  still,  and  for  the  same  reasons. 

In  answer  to  the  objection  that  the  defendant  corporation  by 
its  charter  was  authorized  to  purchase  and  own  distillery  prop- 
erty, and  that  there  was  no  limit  placed  upon  the  amount  of 
property  which  it  might  thus  acquire,  the  Court  said  : 

It  should  be  remembered  that  grants  of  powers  in  corporate  charters 
are  to  be  construed  strictly,  and  that  what  is  not  clearly  given  is  by  im- 
plication denied.  The  defendant  is  authorized  to  own  such  property  as 
is  necessary  to  carry  on  its  distillery  business,  and  no  more.  Its  power 
to  acquire  and  hold  property  is  limited  to  that  purpose,  and  it  has  no 
power  by  its  charter  to  enter  upon  a  scheme  of  getting  into  its  hands 
and  under  its  control  all,  or  substantially  all,  the  distillery  plants  and  the 
distillery  business  of  the  country,  for  the  purpose  of  controlling  produc- 
tion and  prices,  of  crushing  out  competition,  and  of  establishing  a  virtual 
monopoly  in  that  business.  All  such  purposes  are  foreign  to  the  powers 
granted  by  the  charter.  Acquisitions  of  property  to  such  extent  and  for 
such  purpose  do  not  come  within  the  authority  to  own  the  property 
necessary  for  the  purpose  of  carrying  on  a  general  distillery  business.  In 
acquiring  distillery  properties  in  the  manner  and  for  the  purposes  shown 
by  the  information,  the  defendant  has  not  only  misused  and  abused  the 
powers  granted  by  its  charter,  but  has  usurped  and  exercised  powers  not 
conferred  by,  but  which  are  wholly  foreign  to,  that  instrument.  It  has 
thus  rendered  itself  liable  to  prosecution  by  the  state  by  quo  warranto. 
We  are  of  the  opinion  that  upon  the  facts  shown  by  the  information,  the 
judgment  of  ouster  is  clearly  warranted. 

A  case  involving  somewhat  similar  questions  is  that  of  The 
People  V.  The  Milk  Exchange,  decided  by  the  New  York  Court 
of  Appeals. 1     The  Milk  Exchange  had  ninety-odd  stockholders, 

^  145  N.  Y.,  267,  decided  in  1895. 


TRADE   COMBINATIONS   AT   COMMON    LAW          475 

a  large  majority  of  whom  were  milk  dealers  in  the^dty  of  New 
York,  or  creamery  or  milk-commission  men  doing  business  in 
that  vicinity.  At  the  first  meeting  of  the  exchange  after  its 
incorporation,  the  following  among  other  by-laws  was  adopted  : 
"  The  board  of  directors  shall  have  the  power  to  make  and  fix 
the  standard  or  market  price  at  which  milk  shall  be  purchased 
by  the  stockholders  of  this  company."  Acting  upon  this  by-law, 
the  board  of  directors  from  time  to  time  fixed  the  price  of  milk 
to  be  paid  by  dealers,  and  the  prices  so  fixed  largely  controlled 
the  market  in  and  about  the  city  of  New  York. 

The  court,  in  deciding  the  case,  declared  its  conviction  that 
there  was  a  combination  on  the  part  of  milk  dealers  and  cream- 
ery men  in  and  about  the  city  of  New  York  to  fix  and  control 
the  price  that  they  should  pay  for  milk ;  and  that  a  case  was 
presented  in  which  the  jury  might  have  found  that  the  combi- 
nation referred  to  was  inimical  to  trade  and  commerce,  and 
therefore  unlawful.  Accordingly,  the  charter  was  declared 
forfeited. 

It  may  be  claimed  [the  Court  said]  that  the  purpose  of  the  combina- 
tion was  to  reduce  the  price  of  milk  and,  it  being  an  article  of  food,  such 
reduction  was  not  against  public  policy.  But  the  price  was  fixed  for  the 
benefit  of  the  dealers,  and  not  the  consumers,  and  the  logical  effect  upon 
the  trade  of  so  fixing  the  price  by  the  combination  was  to  paralyze  the 
production  and  limit  the  supply,  and  thus  leave  the  dealers  in  a  position 
to  control  the  market,  and  at  their  option  to  enhance  the  price  to  be 
paid  by  the  consumers. 

This  case  is  interesting  as  showing  that  the  courts  will  take 
cognizance  of  an  attempt  through  a  combination  in  the  form  of 
a  corporation  to  lower  the  price  of  commodities  to  the  detriment 
of  the  producer  as  well  as  of  an  attempt  to  enhance  the  price  at 
the  expense  of  the  consumer. 

5.    Attitude  of  the  United  States  Supreme  Court 

Notwithstanding  the  decisions  thus  far  considered,  persons 
who  desired  to  form  a  trade  combination  were  able  to  do  so 
with  impunity,  on  account  of  the  fact  that  if  their  organization 
was  declared  illegal  in  one  state,  they  could  organize  under  the 


476  TRUSTS,    POOLS   AND    CORPORATIONS 

laws  of  another,  provided  the  public  opinion  in  the  latter  was 
not  opposed  to  trade  combinations.  An  attempt  was  therefore 
made  in  what  is  known  as  the  Anti-Trust  Law,  passed  by  Con- 
gress in  1890,  to  give  the  national  government  the  power,  in 
addition  to  that  which  the  states  already  possessed,  to  suppress 
trade  combinations.  But  it  was  recognized  by  the  promoters  of 
this  bill  that  Congress  had  no  jurisdiction  of  specifically  state 
industry  and  commerce.  The  act  was,  therefore,  worded  as 
follows :  "  Every  contract,  combination  in  the  form  of  trust  or 
otherwise,  or  conspiracy  in  restraint  of  trade  or  commerce  among 
the  several  states  or  with  foreign  nations  is  hereby  declared  to 
be  illegal."  Every  one  participating  in  such  a  contract  or  en- 
gaging in  such  a  combination  was  declared  to  be  guilty  of  a 
misdemeanor,  and  made  liable  to  severe  punishment.  It  was 
provided  that  the  circuit  courts  of  the  United  States  should  have 
jurisdiction  to  restrain  violations  of  the  act,  and  that  it  should 
be  the  duty  of  the  law  officers  of  the  United  States  to  institute 
the  proper  proceedings.  A  suit  was  begun  in  Pennsylvania 
against  certain  sugar-refining  corporations  which  had  been  ab- 
sorbed by  the  American  Sugar  Refining  Company.  Evidence 
was  taken  before  Judge  Butler,  of  the  Circuit  Court,  who  said  in 
his  opinion:  "The  object  in  purchasing  the  Philadelphia  re- 
fineries was  to  obtain  a  greater  influence  or  more  perfect  control 
over  the  business  of  refining  and  selling  sugar  in  this  country." 
The  opinion  also  showed  that,  after  the  purchase  of  these 
refineries  by  the  American  Sugar  Refining  Company,  the  latter 
corporation  had  obtained  control  of  all  refineries  in  the  United 
States  except  one  in  Boston,  whose  output  was  about  two  per 
cent  of  the  sugar  refined  in  this  country. 

This  case  went  on  appeal  to  the  Supreme  Court  of  the  United 
States. 1  Here,  on  the  state  of  facts  presented  by  Judge  Butler, 
the  Court  held  that  the  act  of  1890  was  framed  in  the  light  of 
well-settled  principles ;  that 

Congress  did  not  attempt  thereby  to  assert  the  power  to  deal  with  mo- 
nopoly directly  as  such,  or  to  limit  and  restrict  the  rights  of  corporations 
created  by  the  states  or  the  citizens  of  the  states  in  the  acquisition, 

^  United  States  v.  E.  C.  Knight  Co.,  156  U.  S.,  i. 


TRADE    COMBINATIONS   AT   COMMON    LAW  477 

control  or  disposition  of  property,  or  to  regulate  or  prejignbe  the  price 
or  prices  at  which  such  property  or  the  products  thereof  should  be 
sold,  or  to  make  criminal  the  acts  of  persons  in  the  acquisition  and  con- 
trol of  property  which  the  states  of  their  residence  or  creation  sanctioned 
or  permitted.  .  .  .  The  contracts  and  acts  of  the  defendants  related 
exclusively  to  the  acquisition  of  the  Philadelphia  refineries  and  the  busi- 
ness, of  sugar-refining  in  Pennsylvania,  and  bore  no  direct  relation  to, 
commerce  between  the  states  or  with  foreign  nations.  ...  It  is  true" 
that  the  bill  alleged  that  the  products  of  these  refineries  were  sold  and 
distributed  among  the  several  states,  and  that  all  the  companies  were 
engaged  in  trade  or  commerce  with  the  several  states  and  with  foreign 
nations.  But  this  was  no  more  than  to  say  that  trade  and  commerce 
served  manufacture  to  fulfil  its  functions.  ...  It  does  not  follow  that 
an  attempt  to  monopolize  or  the  actual  monopoly  of  the  manufacture 
was  an  attempt,  whether  executory  or  consummated,  to  monopolize 
commerce,  even  though  in  order  to  dispose  of  the  product  the  instru- 
mentality of  commerce  was  necessarily  invoked.  .  .  .  There  was  nothing 
in  the  proofs  to  indicate  any  intention  to  put  a  restraint  upon  trade  or 
commerce  ;  and  the  fact,  as  we  have  seen,  that  trade  or  commerce  might 
be  indirectly  afifected  was  not  enough  to  entitle  the  claimants  to  a  decree. 
The  subject-matter  of  the  sale  was  shares  of  manufacturing  stock,  and 
the  relief  sought  was  the  surrender  of  property  which  had  already  passed 
and  the  suppression  of  the  alleged  monopoly  in  manufacture  by  the 
restoration  of  the  status  quo  before  the  transfers ;  yet  the  act  of  Con- 
gress only  authorized  the  circuit  courts  to  proceed  by  way  of  preventing 
and  restraining  violations  of  the  act  in  respect  of  contracts,  combina- 
tions or  conspiracies  in  restraint  of  interstate  or  international  trade  or 
commerce. 

It  will  be  noticed  that  this  decision  was  based  upon  three 
grounds :  (i)  that  the  proper  remedy  was  not  invoked,  or  at  any 
rate  was  not  invoked  at  the  proper  time;  (2)  that  the  combina- 
tion did  not  disclose  an  attempt  to  monopolize  ;  (3)  that,  even  if 
it  did  so,  it  was  not  a  combination  in  restraint  of  interstate  or 
foreign  commerce. 

As  to  the  first  of  these  grounds,  it  may  be  said  that  the  bill 
which  was  before  the  court  asked  that  an  injunction  might  issue 
to  prevent  and  restrain  the  said  defendants  from  further  and 
continued  violations  of  the  act  of  Congress.  This  was  in  addi- 
tion to  the  demand  that  the  agreements  between  the  defendants 
be  cancelled  and  that  the  shares  of  stock  transferred  in  perform- 


478  TRUSTS,    POOLS   AND  CORPOrL\TIONS 

ance  of  the  contracts  be  restored  to  their  original  owners.-'  As 
to  the  second  ground  of  the  decision,  the  trial  judge  found,  as 
has  been  stated,  that  the  object  in  purchasing  the  Philadelphia 
refineries  was  to  obtain  a  greater  influence  or  more  perfect  con- 
trol over  the  business  of  refining  and  selling  sugar  in  this  coun- 
try. Moreover,  the  state  courts,  in  the  decisions  heretofore 
%:ited,  have  declared  that  they  will  go  back  of  any  alleged  pur- 
pose of  an  agreement  or  of  a  certificate  of  incorporation  and 
will  inquire  what  is  its  real  purpose  and  effect ;  and  that  if  the 
latter  are  to  establish  a  monopoly  unreasonably  limiting  compe- 
tition, they  will  declare  the  agreement  void. 

But  while  these  first  two  considerations  undoubtedly  influenced 
the  Supreme  Court  somewhat,  the  main  ground  upon  which  the 
decision  was  based  was  that  the  manufacture  and  sale  of  sugar 
were  not  interstate  or  foreign  commerce.  In  order  to  reach  this 
decision,  the  Court  laid  little  stress  upon  the  purpose  to  monopo- 
lize the  sale.  The  sale  of  sugar  was  declared  to  be  merely  an 
incident  to  the  manufacture.  As  the  Court  said,  "trade  and 
commerce  serve  manufacture  to  fulfil  its  functions."  Laying 
the  weight  which  they  did  upon  the  manufacture,  they  consid- 
ered that  they  were  bound  by  the  case  of  Kidd  v.  Pearson?' 
Here  the 

question  was  discussed  whether  the  right  of  a  state  to  enact  a  statute  pro- 
hibiting within  its  limits  the  manufacture  of  intoxicating  liquors,  except 
for  certain  purposes,  could  be  overthrown  by  the  fact  that  the  manufac- 
turer intended  to  export  the  liquors  when  made ;  and  it  was  held  that 
the  intent  of  the  manufacturer  did  not  determine  the  time  when  the 
article  or  product  passed  from  the  control  of  the  state  and  belonged  to 
commerce,  and  that  therefore  the  prohibitory  act  was  not  in  conflict 
with  the  constitutional  provision  giving  the  right  to  regulate  interstate 
commerce  to  Congress. 

1  Judge  Harlan,  in  his  dissenting  opinion,  said  on  this  point  :  "  While  a  decree 
annulling  the  contracts  under  which  the  combination  in  question  was  formed  may 
not  in  view  of  the  facts  disclosed  be  effectual  to  accomplish  the  object  of  the  act  of 
1890,  I  perceive  no  difficulty  in  the  way  of  the  court  passing  a  decree  declaring  that 
that  combination  imposes  an  unlawful  restraint  upon  trade  and  commerce  among 
the  states  and  perpetually  enjoining  it  from  further  prosecuting  any  business  pursuant 
to  the  unlawful  agreements  under  which  it  was  formed  or  by  which  it  was  created." 

•-  128  U.  S.,  I. 


TRADE   COMBINATIONS   AT   COMMON    LAW  479 

Another  case  which  seems  to  have  influenced  thcr Court  was 
that  of  Coe  v.  Erroll}  Here  the  question  was  "  whether  certain 
logs  cut  at  a  place  in  New  Hampshire  and  hauled  to  a  river  town 
for  the  purpose  of  transportation  to  the  state  of  Maine  were  lia- 
ble to  be  taxed  like  other  property  in  the  state  of  New  Hamp- 
shire"; and  it  was  held  that  they  were  liable  to  taxation  just 
as  much  as  any  other  property  in  the  state,  and  that  the  own- 
er's intention  and  his  partial  preparation  to  ship  them  out  of 
the  state  would  not  exempt  them  from  taxation  as  articles  of 
interstate  commerce. 

Judge  Harlan,  in  a  dissenting  opinion,  pointed  out,  however, 
that,  under  previous  decisions  of  the  Supreme  Court,  interstate 
commerce  embraced  something  more  than  the  mere  physical 
transportation  of  articles  of  property  and  the  vehicles  or  vessels 
by  which  such  transportation  was  effected.  He  referred  in 
particular  to  the  case  of  Mobile  County  v.  Kimball^  where 
it  was  said  that  commerce  with  foreign  countries  and  among 
the  states,  strictly  considered,  consists  "in  intercourse  and 
traffic,  including  in  these  terms  navigation  and  transportation 
and  transit  of  persons  or  property,  as  well  as  the  purchase,  sale 
and  exchange  of  commodities."  Judge  Harlan  did  not  consider 
that  these  early  statements  and  decisions  had  been  modified  by 
either  of  the  cases  referred  to  in  the  majority's  opinion.  As 
regards  the  question  of  monopoly,  he  said : 

A  combination  such  as  that  organized  under  the  name  of  the  Ameri- 
can Sugar  Refining  Company  has  been  uniformly  held  by  the  courts  of 
the  states  to  be  against  public  policy  and  illegal  because  of  its  neces- 
sary tendency  to  impose  improper  restraints  upon  trade. 

And  further : 

The  object  of  this  combination  was  to  obtain  control  of  the  busi- 
ness of  making  and  selling  refined  sugar  throughout  the  entire  coun- 
try. Those  interested  in  its  operations  will  be  satisfied  with  nothing 
less  than  to  have  the  whole  population  of  America  pay  tribute  to  them. 
That  object  is  disclosed  upon  the  very  face  of  the  transactions  described 
in  the  bill,  and  it  is  proved  —  indeed  conceded  —  that  that  object  has 
been  accomplished  to  the  extent  that   the    American  Sugar   Refining 

1  116U.  S.,  517.  2, 02  U.S.,  691. 


48o  TRUSTS,    POOLS   AND    CORPORATIONS 

Company  now  controls  98  per  cent  of  all  the  sugar-refining  business  in 
the  country,  and  therefore  controls  the  price  of  that  article  everywhere. 
Now  the  mere  existence  of  a  combination  having  such  an  object  and 
possessing  such  extraordinary  power  is  itself  under  settled  principles  of 
law  —  there  being  no  adjudged  case  to  the  contrary  in  this  country  — a 
direct  restraint  of  trade  in  the  article  for  the  control  of  the  sales  of 
which  in  this  country  that  combination  was  organized.  And  that 
restraint  is  felt  in  all  the  states  for  the  reason  known  to  all,  that  the 
article  in  question  goes,  was  intended  to  go  and  must  always  go  into 
commerce  among  the  several  states  and  into  the  homes  of  people  in 
every  condition  of  life. 

Finally,  Judge  Harlan  argued  for  the  public  policy  of  the 
Anti-Trust  Law  in  the  following  language : 

We  have  before  us  the  case  of  a  combination  which  absolutely  con- 
trols, or  may  at  its  discretion  control,  the  price  of  all  refined  sugar 
in  this  country.  Suppose  another  combination  organized  for  private 
gain  and  to  control  prices  should  obtain  possession  of  all  the  large 
flour  mills  in  the  United  States ;  another  of  all  the  grain  elevators ; 
another  of  all  the  oil  territory ;  another  of  all  the  salt-producing 
regions ;  another  of  all  the  cotton-mills ;  and  another  of  all  the  great 
establishments  for  slaughtering  animals  and  the  preparation  of  meats. 
What  power  is  competent  to  protect  the  people  of  the  United  States 
against  such  dangers  except  a  national  power — one  that  is  capable 
of  exerting  its  sovereign  authority  throughout  every  part  of  the  territory 
and  over  all  the  people  of  the  nation? 

The  decision  of  the  United  States  Supreme  Court,  holding 
that  the  manufacture  and  sale  of  commodities  were  not,  as  not 
being  objects  of  interstate  commerce,  subject  to  the  regulation 
of  Congress,  was  therefore  not  reached  without  protest ;  but  the 
Court  was  so  nearly  unanimous  in  its  decision  as  to  justify  the 
belief  that  the  decision  itself  will  not  be  reversed  in  the  imme- 
diate future.!  The  experiences  of  the  states  and  the  arguments 
advanced  by  Judge  Harlan  in  his  dissenting  opinion  would  lead 
also  to  the  belief  that  the  regulation  of  these  trade  combinations 
by  the  states  is  practically  impossible.  Any  attempt  at  efficient 
regulation  must  come  from  the  national  government. 

1  The  opinion  of  the  majority  in  the  recent  case  of  the  Trans-Missouri  Freight 
Association  seems,  however,  to  render  the  future  tendency  somewhat  uncertain. 


TRADE    COMBINATIONS   AT   COMMON    LAW  481 

In  view  of  the  fact  that  great  insistence  was  laid-in  the  last 
presidential  campaign  upon  the  necessity  of  some  efficient  regu- 
lation of  combinations  in  restraint  of  trade,  it  may  be  well  to 
summarize  the  views  that  the  courts  have  expressed  as  to  the 
impolicy  of  permitting  these  combinations  to  exist  and  of  recog- 
nizing or  enforcing  in  any  way  contracts  for  executing  their 
purposes. 

The  reasons  given  by  the  courts  for  their  attitude  may  be 
classified  under  three  heads, — economic,  social  and  political. 
The  economic  reasons  are  two  in  number.  In  the  first  place,  it 
is  believed  by  the  courts  that  a  combination  in  restraint  of  trade 
and  tending  to  promote  a  monopoly  will  result  either  in  the  sale 
of  a  depreciated  article  to  the  public,  or  in  an  enhancement  of 
the  price  of  the  article  which  is  so  controlled.  This  was  the 
important  economic  reason  at  the  basis  of  the  decision  in  the 
time  of  Queen  Elizabeth,  relative  to  monopolies  granted  by 
the  crown.  This  reason  has  had  so  much  weight  with  the  courts 
that  they  have  refused  to  investigate  the  question  whether  such 
has  been  the  effect  of  a  combination.  They  have  simply  de- 
clared that  the  possession  of  monopoly  powers  by  any  combi- 
nation must  inevitably  result  in  an  enhancement  of  price  or  in  a 
depreciation  in  the  quality  of  the  article  sold.  Their  reasoning 
here,  it  will  be  noticed,  is  distinctly  a  priori ;  and  so  long  as 
they  adhere  to  this  principle,  it  will  be  impossible  to  prove  by 
reference  to  actual  facts  whether  it  is  based  upon  the  truth  or 
not.  The  second  economic  argument  advanced  by  the  courts 
in  support  of  their  policy  is  that  the  fixing  by  any  combination 
of  the  price  of  raw  materials  injures  the  producer  of  the  raw 
material,  and  will  ultimately  result  in  disadvantage  to  the 
consumer. 

The  social  argument  against  combinations  also  dates  from  the 
time  of  Elizabeth.     A  monopoly,  the  Court  said, 

tends  to  the  impoverishment  of  divers  artificers  and  others  who  before 
by  the  labor  of  their  hands  in  their  art  or  trade  have  maintained  them- 
selves and  their  families,  who  will  now  of  necessity  be  constrained  to  live 
in  idleness  and  beggary. 

In  the  form  in  which  it  is  put,  this  argument  would  seem  to  rest 


482  TRUSTS,   POOLS   AND    CORPORATIONS 

on  a  misapprehension  of  the  conditions  caused  by  monopolies ; 
and  if  applied  in  as  broad  a  way  as  it  is  stated  in  this  case,  it 
would  be  available  against  the  introduction  of  all  labor-saving 
machinery.  In  the  Ohio  case  of  TJie  State  v.  The  Standard  Oil 
Co.,  already  referred  to,  this  argument  was  somewhat  modified. 
The  Court  took  the  ground,  not  so  much  that  the  formation  of 
the  combination  throws  great  numbers  of  individuals  out  of  em- 
ployment, as  that  the  development,  of  monopolies  transforms 
great  numbers  of  persons  formerly  independent  into  employees 
or  servants.  This  argument,  though  treated  by  the  Ohio  court 
as  a  development  of  the  view  of  the  English  court  in  the  case 
of  monopolies,  is  really  quite  different  in  character.  A  further 
argument  of  a  social  character  is  to  be  found  in  the  opinion  of 
Judge  Finch  in  the  Sugar  Trust  case.  He  based  the  right  of  the 
state  to  limit  the  activity  of  corporations,  as  distinct  from  that  of 
individuals,  on  the  ground  that  a  direct  grant  of  corporate  powers 
would,  if  these  powers  were  not  limited,  aid  in  the  aggregation 
of  wealth  in  a  few  hands.  He  did  not  desire  to  limit  the  right  of 
individual  action,  but  merely  claimed  that  when  specific  powers 
which  can  only  exist  as  a  result  of  the  grant  of  the  state  are 
exercised  by  individuals,  they  become  rightly  subject  to  regula- 
tion in  the  interest  of  the  state  as  a  w^hole.  It  is  one  thing,  said 
he,  for  the  state  to  respect  the  rights  of  ownership  and  protect 
them  out  of  regard  to  the  business  freedom  of  the  citizen ; 
but  it  is  quite  another  thing  for  the  state  positively  to  promote 
the  aggregation  of  capital  by  creating  artificial  persons  such  as 
corporations,  without  limiting  their  powers. 

The  political  reason  advanced  by  the  courts  for  their  position 
with  regard  to  trade  combinations  is  perhaps  as  well  stated  as 
anywhere  by  the  supreme  court  of  Georgia.  Here  it  is  pointed 
out  that  all  large  accumulations  of  property  in  hands  likely  to 
keep  it  intact  for  a  long  period  are  dangerous  to  the  public  weal. 
In  England  it  was  found  necessary  to  Hmit  the  amount  of  prop- 
erty which  even  reHgious  corporations  might  possess,  notwith- 
standing the  fact  that  they,  far  more  than  trading  bodies,  might 
be  expected  to  exercise  their  powers  for  the  general  good. 
Given  the  privilege  of  legal  immortality,  corporations,  it  was 
held,  are  apt  to  "become  entirely  too  strong  for  that  society 


TRADE    COMBINATIONS   AT   COMMON    LAW  483 

which  is  made  up  of  those  whose  plans  are  Hmitcd  by  a  single 
life." 

Such  are  the  rules  of  law  in  the  United  States  with  regard 
to  the  legality  of  trade  combinations,  and  such  are  the  reasons 
which  the  courts  have  advanced  for  the  adoption  of  these  rules. 
If  these  reasons  are  not  sound,  if  the  conditions  of  society  are 
not  what  they  were  when  these  rules  were  adopted  and  these 
reasons  were  first  advanced,  it  would  be  well  that  the  rules  of 
law  be  changed.  Changes  may  be  made  by  legislation,  as  has 
very  generally  been  done  in  the  case  of  labor  combinations.  If, 
on  the  other  hand,  these  reasons  are  now  sound  and  the  rules  of 
law  based  thereon  are  at  the  present  time  in  accordance  with 
public  policy,  some  method  ought  to  be  provided  for  their  effi- 
cient enforcement.  This,  it  has  been  pointed  out,  can  in  the 
cases  of  the  largest  combinations  now  in  existence  be  done  only 
through  the  modification  of  the  present  rule  of  the  United  States 
Supreme  Court  with  regard  to  national  regulation  of  monopolies; 
or,  in  case  the  Supreme  Court  shall  not  see  fit  to  modify  its  rules, 
by  the  adoption  of  a  constitutional  provision  giving  the  Congress 
of  the  United  States  the  necessary  powers. 

Frank  J.  Goodnow 


XV 

THE    SHERMAN    ACT   AND   ITS   INTERPRETATION 

AN    ACT  TO   PROTECT    TRADE   AND    COMMERCE    AGAINST   UNLAW- 
FUL  RESTRAINTS   AND   MONOPOLIES  i 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the  United 
States  of  America  in  Congress  assembled, 

§  I.  "  Every  contract,  combination  in  the  form  of  trust  or  otherwise, 
or  conspiracy,  in  restraint  of  trade  or  commerce  among  the  several 
states,  or  with  foreign  nations,"  is  hereby  declared  to  be  illegal.  Every 
person  who  shall  make  any  such  contract  or  engage  in  any  such  com- 
bination or  conspiracy,  shall  be  deemed  guilty  of  a  misdemeanor  and, 
on  conviction  thereof,  shall  be  punished  by  a  fine  not  exceeding  five 
thousand  dollars,  or  by  imprisonment  not  exceeding  one  year,  or  by 
both  said  punishments,  in  the  discretion  of  the  court. 

§  2.  "  Every  person  who  shall  monopolize,  or  attempt  to  monopo- 
lize, or  combine  or  conspire  with  any  other  person  or  persons,  to 
monopolize  any  part  of  the  trade  or  commerce  among  the  several 
states,  or  with  foreign  nations,"  shall  be  deemed  guilty  of  a  misde- 
meanor, and,  on  conviction  thereof,  shall  be  punished  by  fine  not 
exceeding  five  thousand  dollars,  or  by  imprisonment  not  exceeding  one 
year,  or  by  both  said  punishments,  in  the  discretion  of  the  court. 

§  3.  Every  contract,  combination  in  form  of  trust  or  otherwise,  or 
conspiracy,  in  restraint  of  trade  or  commerce  in  any  territory  of  the 
United  States  or  of  the  District  of  Columbia,  or  in  restraint  of  trade 
or  commerce  between  any  such  territory  and  another,  or  between  any 
such  territory  or  territories  and  any  state  or  states  or  the  District  of 
Columbia,  or  with  foreign  nations,  or  between  the  District  of  Colum- 
bia and  any  state  or  states  or  foreign  nations,  is  hereby  declared 
illegal.  Every  person  who  shall  make  any  such  contract  or  engage  in 
any  such  combination  or  conspiracy,  shall  be  deemed  guilty  of  a  mis- 
demeanor, and,  on  conviction  thereof,  shall  be  punished  by  fine  not 
exceeding  five  thousand  dollars,  or  by  imprisonment  not  exceeding 
one  year,' or  by  both  said  punishments,  in  the  discretion  of  the  court. 

1  26  Statutes  at  Large,  209. 
484 


THE   SHERMAN    ACT   AND   THE    RAILROADS        485 

§  4.  The  several  circuit  courts  of  the  United  Statas-  are  hereby 
invested  with  jurisdiction  to  prevent  and  restrain  violations  of  this 
act ;  and  it  shall  be  the  duty  of  the  several  district  attorneys  of  the 
United  States,  in  their  respective  districts,  under  the  direction  of  the 
attorney-general,  to  institute  proceedings  in  equity  to  prevent  and 
restrain  such  violations.  Such  proceedings  may  be  by  way  of  petition 
setting  forth  the  case  and  praying  that  such  violation  shall  be  enjoined 
or  otherwise  prohibited.  When  the  parties  complained  of  shall  have 
been  duly  notified  of  such  petition  the  court  shall  proceed,  as  soon  as 
may  be,  to  the  hearing  and  determination  of  the  case  ;  and  pending 
such  petition  and  before  final  decree,  the  court  may  at  any  time  make 
such  temporary  restraining  order  or  prohibition  as  shall  be  deemed 
just  in  the  premises. 

§  5.  Whenever  it  shall  appear  to  the  court  before  which  any  pro- 
ceedings under  section  four  of  this  act  may  be  pending,  that  the  ends 
of  justice  require  that  other  parties  should  be  brought  before  the  court, 
the  court  may  cause  them  to  be  summoned,  whether  they  reside  in  the 
district  in  which  the  court  is  held  or  not ;  and  subpoenas  to  that  end 
may  be  served  in  any  district  by  the  marshal  thereof. 

§  6.  Any  property  owned  under  any  contract  or  by  any  combination, 
or  pursuant  to  any  conspiracy  (and  being  the  subject  thereof)  men- 
tioned in  section  one  of  this  act,  and  being  in  the  course  of  transpor- 
tation from  one  state  to  another,  or  to  a  foreign  country,  shall  be 
forfeited  to  the  United  States,  and  may  be  seized  and  condemned  by 
like  proceedings  as  those  provided  by  law  for  the  forfeiture,  seizure, 
and  condemnation  of  property  imported  into  the  United  States  con- 
trary to  law. 

§  7.  Any  person  who  shall  be  injured  in  his  business  or  property 
by  any  person  or  corporation  by  reason  of  anything  forbidden  or 
declared  to  be  unlawful  by  this  act,  may  sue  therefore  in  any  circuit 
court  of  the  United  States  in  the  district  in  which  the  defendant 
resides  or  is  found,  without  respect  to  the  amount  in  controversy,  and 
shall  recover  threefold  the  damages  by  him  sustained,  and  the  cost  of 
the  suit,  including  a  reasonable  attorney's  fee. 

§  8.  That  the  word  "  person,*'  or  "  persons,"  wherever  used  in  this 
act  shall  be  deemed  to  include  corporations  and  associations  existing 
under  or  authorized  by  the  laws  of  either  the  United  States,  the  laws 
of  any  of  the  territories,  the  laws  of  any  state,  or  the  laws  of  any  for- 
eign country. 

Approved,  July  2,  1890. 


486  TRUSTS,   POOLS  AND   CORPORATIONS 

No  piece  of  legislation  can  be  understood,  much  less  appre- 
ciated, except  in  the  light  of  the  circumstances  attending  its 
enactment.^  This  is  particularly  true  of  the  Sherman  Anti- 
Trust  law  as  applied  to  transportation.  Prior  to  1887,  indus- 
trial combination  in  the  United  States  had  scarcely  passed  the 
stage  of  incubation.  Something  was  evidently  doing  within ; 
but  the  outer  shell  had  not  yet  been  broken  wide  open.  Cer- 
tain combinations,  notably  the  Standard  Oil  Company,  had 
already,  to  be  sure,  grossly  outraged  public  opinion.  And  it 
is  indubitable  that  its  offenses  against  commercial  decency  were 
among  the  causes  contributing  to  the  passage  of  the  Act  to 
Regulate  Commerce  in  1887.^  But  the  real  outbreak  of  indus- 
trial combination  over  a  wider  field  did  not  occur  for  some  time 
thereafter.  The  later  years  of  the  decade  of  the  '80s  were 
associated  with  active  investigation  of  industrial  affairs  with 
the  tariff  looming  large  in  the  background  behind  the  issue  of 
monopoly.  A  number  of  anti-trust  laws  were  passed  about 
this  period,  along  with  the  far-reaching  New  Jersey  statute  of 
1889,  which  empowered  its  corporations  to  hold  stocks  in  other 
companies  anywhere.  It  was  undoubtedly  the  public  feeling 
productive  of  these  investigations  and  bits  of  state  legislation, 
which  also  induced  Congress  to  place  the  Sherman  Act  upon 
the  statute  books  in  1890.  This  statute,  succeeding  the  Act  to 
Regulate  Commerce  after  an  interval  of  three  years,  seems  to 
have  been  introduced  primarily  as  a  remedy  for  purely  indus- 
trial evils,  unassociated  with  railroading  as  such.  For  the 
Interstate  Commerce  Act  was  at  the  time  regarded  as  adequate 
for  dealing  with  the  existing  transportation  abuses. 

The  Congressional  history  of  the  Sherman  Act  is  important 
in  its  bearings  upon  the  question  as  to  the  intent  to  bring  com- 
mon carriers  within  the  prohibitions  of  the  statute.^  As  early 
as  1888  Senator  Sherman  of  Ohio  introduced  a  bill  declaring  all 
combinations,  conspiracies  and  agreements  in  restraint  of  trade 

1  From  W.  Z.  Ripley,  Railroads:  Finance  and  Organization,  pp.  549-574. 

2  Ripley,  Railroads :   Rates  and  Regulation,  p.  445. 

^  Most  conveniently  traceable  in  Bills  and  Debates  in  Congress  Relating  to 
Trusts,  57th  Cong.,  2d  sess.,  Senate  Doc.  no.  157,  I,  1903;  Autobiography,  by 
Hon.  G.  F.  Hoar,  vol.  H,  p.  362  e^se^. 


THE   SHERMAN    ACT   AND   THE    RAILROADS        487 

unlawful.  This  died  in  committee.  An  identical^^bill,  except 
for  the  elimination  of  "  conspiracy  "  and  "  restraint  of  trade  " 
was  reintroduced  in  the  following  year.  The  first  decisive  step 
was  taken  in  1890,  when  the  Committee  on  Judiciary  reported 
to  the  Senate,  recommending  that  everything  except  the  enact- 
ing clause  in  the  latest  Sherman  bill  should  be  stricken  out,  and 
that  an  entirely  new  measure  drafted  by  Senator  Hoar  of 
Massachusetts  be  substituted.^  It  was  this  bill  which  subse- 
quently became  the  Sherman  Act,  so  called  as  Senator  Hoar 
somewhat  tartly  observes  "  only  because  Sherman  had  nothing 
whatever  to  do  with  it." 

It  is  uncertain  whether  it  was  originally  intended  to  include 
railroads  under  the  Anti-Trust  law.  The  indetermination  of 
the  Congressional  mind  is  clearly  brought  out  in  the  divided 
opinion  of  the  Supreme  Court  of  the  United  States  in  the 
Trans-Missouri  Freight  Association  case.^  Five  justices  de- 
clared that  it  was  "  impossible  to  say  what  were  the  views  of  a 
majority  of  the  members  of  each  house,"  as  well  as  "  that  the 
debates  in  Congress  are  not  appropriate  sources  of  information 
for  this  purpose."  Not  satisfied  with  this  disposition  of  the 
matter,  four  justices  in  the  dissenting  opinion  reviewed  in  detail 
the  Congressional  history  of  the  bill.  Evidence  was  found  to 
their  satisfaction  that  a  determined  effort  was  made,  by  means 
of  amendments  proposed,  to  include  transportation  contracts 
or  agreements,  but  that  the  effort  was  unsuccessful.  According 
to  this  interpretation  there  was  no  purpose  to  interfere  with 
the  Interstate  Commerce  Act.  These  dissidents,  consequently, 
held  that  all  activities  of  common  carriers  should  be  adjudged 
according  to  the  provisions  of  the  Act  to  Regulate  Commerce 
of  1887  and  not  by  the  Sherman  Act  at  all.  It  is  rather  sig- 
nificant in  view  of  this  closely  divided  opinion,  that  the  statute 
has  subsequently  been  so  broadly  applied  to  the  common  car- 
riers of  the  country  in  the  series  of  decisions  henceforward  to 
be  reviewed. 

The  text  of  the  Sherman  Act^  "To  protect  trade  and  com- 

1  21  Cong.  Record,  pp.  2901  and  4089. 

2  166  U.  S.  317  and  359. 

8  Reprinted  in  full,  pp.  484,  supra. 


488  TRUSTS,   POOLS  AND   CORPORATIONS 

merce  against  unlawful  restraints  and  monopolies  "  in  the  first 
section  declares  illegal : 

Every  contract,  combination  in  the  form  of  trust  or  otherwise,  or 
conspiracy,  in  restraint  of  trade  or  commerce  among  the  several  states, 
or  with  foreign  nations. 

The  second  section  turns  from  restraint  of  trade  to  monopoly. 

Every  person  who  shall  monopolize,  or  attempt  to  monopolize,  or 
combine  or  conspire  with  any  other  person  or  persons,  to  monopoUze 
any  part  of  the  trade  or  commerce  among  the  several  states,  or  with 
foreign  nations, 

commits  a  misdemeanor,  punishable  by  fine  and  imprison- 
ment. By  the  third  section  of  the  Act,  the  same  prohibitions 
are  made  applicable  to  the  territories  as  well  as  to  the  states. 
The  remaining  clauses  are  unimportant  for  our  purpose  save, 
perhaps,  the  sixth  which  declares  any  prescribed  property  in 
the  course  of  interstate  transportation  forfeit  and  defines  the 
word  "person"  as  including  corporations.  The  law  was  indeed 
quite  brief  by  comparison  with  the  extended  and  elaborate 
Interstate  Commerce  Act. 

As  a  background  for  the  examination  of  the  application  of 
the  Sherman  Act  to  railroads,  attention  should  be  directed  to 
the  extreme  unevenness  with  which  that  statute  has  been  en- 
forced by  Federal  executive  authority.  Only  thus  does  it  be- 
come apparent  why  combination  among  railroads  was  enabled 
to  attain  so  considerable  a  momentum  before  the  inhibitions  of 
the  Act  were  brought  into  play  at  all.  The  record  of  the  differ- 
ent presidential  administrations  is  illuminating.  As  Professor 
Seager  observes,^  it  will  now  scarcely  be  denied  that  three 
successive  presidents  and  five  successive  attorneys-general  were 
seriously  remiss  in  their  duty.  Under  the  administration  of 
President  Harrison,  to  March,  1893,  only  four  bills  in  equity  were 
filed,  and  but  three  indictments  were  returned.  The  succeed- 
ing term  of  President  Cleveland,  to  1897,  witnessed  the  same 
number  of  bills  with  only  two  indictments.     The  disappointing 

^  Political  Science  Quarterly,  vol.  XXVI,  191 1,  p.  584.  The  pamphlet  summary 
of  Anti-Trust  Decisions,  published  by  the  Department  of  Justice  annually,  contains 
the  record. 


THE    SHERMAN    ACT   AND   THE    RAILROADS        489 

outcome  of  the  first  prosecutions  attempted  probably  accounts 
in  a  measure  for  this  lack  of  interest;  although  the  affirmed 
illegality  of  railroad  pooling  somewhat  relieved  the  monotony. 
The  low  water  mark  of  enforcement  of  the  Anti-Trust  law  was 
touched  under  President  McKinley,  during  the  four  years 
1 897- 1 90 1.  The  statute  was  practically  a  dead  letter  so  far  as 
either  railroads  or  industrial  combinations  were  concerned. 
The  artillery  of  the  Department  of  Justice  was,  to  be  sure, 
trained  upon  one  petty  live  stock  combination  and  certain 
agreements  among  local  coal  dealers.  But  the  attention  of 
the  country  seems  to  have  been  fixed  rather  upon  sowing  the 
seeds  of  monopoly  than  upon  any  attempt  to  prepare  the  soil 
for  a  more  healthy  industrial  crop. 

During  this  long  dull  period,  while  the  existence  of  "teeth" 
in  the  Sherman  Act  was  so  wholly  unsuspected,  it  is  not  sur- 
prising that  its  judicial  interpretation  as  applied  to  railroads 
occurred  only  in  connection  with  pooling.  As  a  matter  of  fact 
the  great  railroad  combination  movement  did  not  get  under  way 
until  somewhat  later.  Hence  the  distinction  of  applying  almost 
the  first  test  was  reserved  for  the  Trans-Missouri  Freight  Asso- 
ciation in  1897.^  The  structure  and  functioning  of  organizations 
of  this  sort  will  be  considered  in  the  next  chapter ;  but,  inas- 
much as  this  first  railroad  decision  really  turned  upon  the  ques- 
tion of  monopoly  rather  than  of  pooling  Z^?' .yf  as  defined  in  the 
Act  of  1887,  its  legality  may  be  considered  as  a  thing  quite  sep- 
arate and  apart  from  its  economic  serviceableness.  This  is 
particularly  true  since  the  latest  turn  of  interpretation,  awaiting 
our  analysis,  which  holds  that  legality  is  to  be  adjudged  in  the 
light  of  reason  and  not  according  to  any  absolute  and  arbitrary 
standard.  As  for  the  Trans-Missouri  Freight  Association  pro- 
ceedings, both  of  the  lower  Federal  courts  held  that  the  Sher- 
man Act  had  not  been  violated ;  and  the  Supreme  Court 
decision,  reversing  these  judgments,  was,  as  we  have  already 
seen,  rendered  by  a  bare  majority,  four  justices  out  of  nine 
dissenting.  The  first  aspect  of  the  matter,  namely  as  to  whether 
the  Anti-Trust  law  comprehended  common  carriers  by  rail,  has 

1  166  U.  S.  290  ;  reprinted  as  55th  Cong.,  1st  sess.,  Senate  Doc.  no.  12;  cf.  also 
Harvard  Law  Review,  Vol.  XI,  1897,  pp.  80-94. 


490  TRUSTS,   POOLS  AND   CORPORATIONS 

already  been  touched  upon  ;  especially  the  strong  dissenting 
view  that  in  the  absence  of  a  definite  application  of  the  Anti- 
Trust  law  to  railroads,  inasmuch  as  the  statute  was  expressed  in 
general  terms  while  the  Act  to  Regulate  Commerce  antedating 
it  by  three  years  was  specific,  the  latter  exempted  the  carriers 
entirely  from  the  drastic  prohibitions  against  monopolistic  com- 
bination. 

The  second  judicial  construction  of  the  Sherman  Act  for 
common  carriers  within  a  few  months  reenforced  the  first.  The 
Joint  Traffic  Association,  an  agreement  entered  into  in  1895  by 
thirty-two  railroads  operating  east  of  Chicago,  was  declared 
unlawful  in  1898.^  This  pool  was  attacked  not  only  as  violating 
the  Anti-Trust  law,  as  in  the  Trans-Missouri  case,  but  also  as 
being  contrary  to  the  Act  to  Regulate  Commerce.  An  attempt 
was  made  to  distinguish  between  this  and  the  Trans-Missouri 
Freight  Association  case,  on  the  ground  that  the  latter  associa- 
tion actually  conferred  power  to  fix  rates,  whereas  the  Joint 
Traffic  Association  merely  provided  for  the  adoption  jointly  of 
such  rates  as  were  in  force.  Both  of  the  lower  Federal  courts 
once  more  held  that  such  agreements  were  not  repugnant  to  the 
provisions  of  the  Interstate  Commerce  Act.  But  the  force  of 
the  argument  in  the  Supreme  Court  was  directed  entirely  to  the 
interpretation  of  the  Anti-Trust  law;  and  it  was  finally  decided, 
as  in  the  preceding  case,  that  the  agreement  was  in  contravention 
of  that  statute. 

Between  the  pooling  decisions  in  1897  and  the  suggested 
reorganization  of  the  St.  Louis  Terminal  Company  fifteen  years 
thereafter,  despite  the  extraordinary  activity  in  the  field  of  rail- 
road consolidation  described  in  the  preceding  chapters,  the 
Supreme  Court  only  once  passed  upon  the  validity  of  attempts 
to  substitute  monopoly  for  competition  in  railroading.  The  one 
interrupting  opinion  is  of  great  importance  ;  but,  before  proceed- 
ing to  its  examination,  it  may  not  be  out  of  place  to  inquire  still 
further  as  to  the  reasons  for  the  prolonged  judicial  quiescence. 
It  is  the  more  striking  in  view  of  the  new  life  infused  into  the 
Sherman  Act  under  the  administration  of  President  Roosevelt 
in    1901-1909.     No    fewer    than    twenty-five   indictments    and 

1 171  U.  S.  505. 


THE   SHERMAN    ACT   AND   THE   RAILROADS        491 

eighteen  bills  in  equity  were  returned,  by  way  of  T^ntrast  with 
only  five  indictments  and  ten  bills  in  equity  during  the  entire 
three  preceding  presidential  terms.  But  even  greater  assiduity 
was  to  characterize  the  administration  of  President  Taft  to  191 3. 
Within  a  period  scarcely  half  the  length  of  Roosevelt's  term, 
twenty  indictments  and  seventeen  bills  attended  the  vigorous 
initiative  of  the  Federal  Department  of  Justice.  Quite  apparently 
it  was  only  after  the  more  impressive  and  convincing  manifesta- 
tions of  the  evil  of  monopoly  in  trade  and  manufacture  had  been 
disposed  of,  that  the  attorney-general  was  able  to  redirect 
attention  to  the  common  carriers.  It  is  probable,  also,  that  the 
Northern  Securities  decision,  which  alone  broke  the  long  period 
of  immunity  from  prosecution  of  the  railroads,  was  in  itself  of 
such  compelling  importance  that  much  was  accomplished  in- 
formally in  the  way  of  admonition  and  repression.  The  fact 
also  deserves  consideration  that  the  peculiar  interpretation  placed 
upon  the  Sherman  Act  by  President  Roosevelt,  inducing  him  to 
stay  the  original  proceedings  instituted  in  1908  against  the  New 
Haven  combination,  undoubtedly  operated  to  discourage  a  more 
searching  test  of  the  law  as  applied  to  common  carriers  at  the 
time. 

Narrowly  viewed,  the  Northern  Securities  decision  in  1904^ 
is  significant  as  abruptly  putting  an  end  to  the  holding  company 
as  a  legal  instrumentality  for  the  attainment  of  monopoly,  and 
as  coincidently  displaying  cautionary  signals  with  regard  to  the 
possible  misuse  of  intercorporate  stock  ownership.  The  facts 
in  the  case  have  already  been  spread  upon  our  pages  in  various 
other  connections  and  do  not  call  for  restatement.  The  con- 
demnation was  explicit.  "  If  Congress  has  not,  by  the  words 
used  in  the  (Sherman)  Act,  described  this  and  like  cases,  it 
would,  we  apprehend,  be  impossible  to  find  words  that  would 
describe  them."  For  without  such  judicial  construction  "then 
the  efforts  of  the  national  government  to  preserve  to  the  people 
the  benefits  of  free  competition  among  carriers  engaged  in  inter- 
state commerce  will  be  wholly  unavaihng,  and  all  transcon- 
tinental lines,  indeed  the  entire  railway  systems  of  the  country, 

1  193  U.  S.  197.  The  material  facts  are  given  in  extenso  in  Ripley,  Railroads  : 
Finance  and  Organization,  and  Railway  Problems,  rev.  ed.,  chapter  XXI. 


492  TRUSTS,    POOLS   AND   CORPORATIONS 

may  be  absorbed,  merged  and  consolidated,  thus  placing  the 
public  at  the  absolute  mercy  of  the  holding  corporation."  The 
objection  was  swept  aside  that  the  prohibition  of  unrestricted 
intercorporate  stockholding  would  be  an  unconstitutional  in- 
fringement upon  the  right  to  do  as  one  wills  with  one's  prop- 
erty. The  immediate  and  direct  result  of  the  decision,  then, 
was  to  relegate  the  holding  company  along  with  the  "  trust "  to 
harmless  disuse.  But  the  importance  of  the  Northern  Securities 
opinion  does  not  stop  here.  It  is  even  more  commanding  upon 
broad  constitutional  grounds.  Two  separate  questions  were 
treated  and  settled  at  one  and  the  same  time.  The  first  apper- 
tained to  the  competing  and  conflicting  powers  of  the  different 
states  with  one  another.  The  second  confronted  the  sovereignty 
of  the  several  states  with  that  of  the  Federal  government.  It 
was  the  mere  ownership  by  one  corporation  of  the  capital  stock 
of  another  which  started  the  trouble,  to  be  sure ;  but  from  this 
kernel  the  controversy  grew  and  spread  until  the  ultimate  prin- 
ciples of  our  framework  of  government  became  involved. 

As  to  the  conflicting  authority  of  state  with  state,  in  the 
matter  of  railroad  stockholdings,  our  preceding  review  of  the 
material  facts  is  almost  self-explanatory.  The  state  of  New 
Jersey  through  its  license  by  charter  to  the  Northern  Securities 
Company  to  hold  railway  stocks  without  let  or  hindrance,  ex- 
cept for  the  obligation  to  pay  taxes  into  the  state  treasury, 
empowered  it  to  commit  acts  within  the  jurisdiction  of  a  sister 
state  which  were  repugnant  to  the  laws  thereof  —  as  well  as 
to  the  Federal  Anti-Trust  law,  after  which  most  of  the  state 
statutes  were  fashioned.  For,  in  consequence  of  the  deeply 
aroused  public  opinion  throughout  the  Northwest,  the  Northern 
Securities  Company  had  already  been  put  to  the  test,  as  well  in 
the  highest  state  courts  as  in  the  Supreme  Court  of  the  United 
States,  under  the  provisions  of  the  Anti-Trust  law  of  Minnesota  ; 
and  the  device  of  the  holding  company  had  thus  been  found  to 
be  in  contravention  of  the  terms  and  intent  of  that  state  statute.^ 
Any  state,  as  the  opinion  ran,  did  it  so  choose,  might  submit  to 
the  existence  of  combination  within  its  own  limits  that  restrained 
its  internal  trade  ;  but  beyond  that  frontier  it  might  not  "  project 

1  Peat-sally.  Great  Northern,  etc.,  i6i  U.  S.  646. 


THE   SHERMAN    ACT   AND   THE    RAH.ROADS        493 

its  authority  into  other  states  and  across  the  continent."  No 
longer  could  immunity  by  a  New  Jersey  corporation  be  success- 
fully maintained  within  the  territory  of  Minnesota  against  the 
expressed  will  of  the  people  of  that  commonwealth.  The 
soundness  of  this  general  rule  is  above  dispute. 

Equally  plain  was  the  purport  of  the  Northern  Securities 
decision  in  its  affirmation  of  the  paramount  authority  of  the 
Federal  government  over  the  several  states ;  even  in  such 
matters  of  seemingly  private  finance  as  the  charter  riglit  to 
hold  stocks  in  their  own  corporations.  Much  depended  at  this 
point  upon  the  nature  of  stock  ownership,  that  is  to  say,  as  to 
whether  interstate  stock  ownership  was  in  reality  interstate 
commerce.  No  difference  of  opinion  is  evident  upon  the  pro- 
posal that  Congress  should  stay  its  hands  "  to  the  detriment  of 
the  public  because,  forsooth,  the  corporations  concerned  or 
some  of  them  are  state  corporations.  .  .  .  No  such  view  can 
be  entertained  for  a  moment."  But  serious  dissent  was 
registered  against  the  affirmation  that  stock  ownership  and 
interstate  commerce  were  indistinguishable  at  law.  Yet,  not- 
withstanding the  vigorous  dissenting  view  that  Congress  was 
void  of  power  to  regulate  or  control  the  acquisition  and  owner- 
ship of  railway  stocks  by  the  Northern  Securities  Company, 
the  majority  opinion  to  the  contrary  prevailed,  and  thus  became 
law. 

Peculiar  significance  in  a  large  way  also  attaches  to  the 
Northern  Securities  decision  as  foreshadowing  an  about-face  on 
the  part  of  the  Supreme  Court  in  the  general  interpretation  of 
the  Sherman  Act.  Perhaps  the  most  puzzling  feature  of  this 
brief  and  seemingly  drastic  statute,  as  judicially  construed,  pre- 
sents itself  in  this  connection.  Are  all  arrangements  or  prac- 
tices without  exception  or  limitation  of  any  sort  forbidden  ;  or 
was  it  the  intention  merely  to  prohibit  those  which  potentially 
or  actually  were  unreasonable  .''  Is  competition  to  be  perpetuated 
regardless  of  results ;  or  shall  a  sound  public  policy  permit  a 
distinction  between  those  acts  provocative  of  economy  and  effi- 
ciency and  those  others  which  are  necessarily  and  always  inimical 
to  the  common  welfare  ?  Throughout  the  extended  series  of  de- 
cisions applying  the  Anti-Trust  law  under  all  sorts  of  circum- 


494  TRUSTS,   POOLS  AND   CORPORATIONS 

stances  and  conditions,  the  notable  change  in  opinion  is,  oddly 
enough,  in  view  of  the  fact  that  this  statute  was  originally- 
intended  to  deal  with  business  rather  than  transportation,  most 
clearly  discernible  in  the  great  railroad  cases.  As  we  have  al- 
ready seen,  in  the  test  applied  in  the  pooling  cases  in  1 897-1 898, 
the  Court  by  a  bare  majority  held  that  the  statute  forbade  all 
combinations  of  whatever  sort,  reasonable  and  unreasonable 
alike. -^ 

In  the  Northern  Securities  case,  the  majority  of  the  Court 
after  the  lapse  of  seven  years  still  adhered  to  its  original  con- 
struction as  to  reasonableness ;  but  Justice  Brewer,  in  what  is 
possibly  the  most  significant  portion  of  the  entire  decision,  an- 
nounced his  conversion  to  the  belief  that  the  ruling,  not  only 
in  this  but  in  the  pooling  cases  as  well,  should  have  condemned 
the  arrangements  at  bar  because  they  were  restraints  upon 
trade  which  were  unreasonable  per  se,  and  not  merely  because 
they  operated  to  interfere  somehow  or  other  with  the  free  exer- 
cise of  competition.  The  dissenting  opinion  of  Justice  Holmes 
also  coincided  with  this  view  of  the  matter.  The  prohibitions 
of  the  law  "  certainly  do  not  require  all  existing  competitions 
to  be  kept  on  foot.  ...  I  am  happy  to  know  that  only  a  minor- 
ity of  my  brethren  adopt  an  interpretation  of  the  law  which  in 
my  opinion  would  make  eternal  the  be /him  oni7iinni  contra  omnes 
and  disintegrate  society  so  far  as  it  could  into  individual  atoms. 
If  that  were  its  intent  I  should  regard  calling  such  a  law  a 
regulation  of  commerce  as  a  mere  pretence.  It  would  be  an 
attempt  to  reconstruct  society."  It  only  remained  for  the  con- 
version of  the  remaining  justices  to  take  place  in  the  next  great 
case.  Out  of  the  confusing  fogs  of  legal  doctrine  and  the  dis- 
turbed cross  currents  of  interpretation  of  economic  history,  the 
Supreme  Court  at  last  emerged  upon  the  broad  and  open  sea  in 
the  great   Standard   Oil  Company  decision  of   1911.^     Dissent 


^This  development  is  most  clearly  traceable  in  the  Standard  Oil  opinion  of  191 1, 
page  552,  infra,  to  which  should  be  added  the  concurring  opinion  of  Justice 
Brewer  in  the  Northern  Securities  case,  193  U.  S.  361;  and  the  dissenting  opinion, 
idetn,  407  ff .  Cf.  Young's  dissents  from  this  view  in  Journal  of  Political  Economy, 
vol.  XXIII,  1915,  p.  205. 

^  221  U.  S.  I. 


THE   SHERMAN    ACT   AND   THE    RAILROADS        495 

almost  vanished.  With  substantial  unanimity  it  "wscs  held  un- 
equivocally that  the  Anti-Trust  Act  was  to  be  construed  "  in 
the  light  of  reason."  All  but  one  member  of  the  Court  agreed 
that  the  prohibition  applied  only  to  such  contracts  and  combina- 
tions as  amounted  to  an  unreasonable  or  undue  restraint.  All 
other  arrangements  which  conduced  to  a  smoother  and  more 
efficient  conduct  of  business  were  declared  lawful. 

Merely  to  prove  monopolistic  intent  or  attainment,  irrespective 
of  its  nature  or  quality,  under  all  the  complicated  circumstances 
of  modern  industrial  life,  is  at  best  a  difficult  task.  But  it  is  far 
easier  than  to  attempt  to  draw  the  line  between  "good"  and 
"bad"  restraint,  actual  or  potential.  Yet  such  was  the  obliga- 
tion imposed  upon  itself  by  the  Supreme  Court  through  its  new 
construction  of  the  statute.  The  first  occasion  in  the  field  of 
transportation  was  offered  in  complaint  against  the  St.  Louis 
Terminal  Railroad  Association.  The  opinion  ^  clearly  exhibits 
the  advantages  which  may  be  expected  to  flow  from  an  interpre- 
tation of  the  Anti-Trust  law  according  to  the  rule  of  reason  laid 
down  in  the  Standard  Oil  case.  For  the  first  time  one  might 
entertain  hope  of  constructive  results  to  flow  from  the  differen- 
tiation of  concerted  acts  inimical  to  the  public  interest,  from 
those  which,  rightly  applied,  would  contribute  to  the  public  ad- 
vantage. The  facts  were  as  follows :  Although  twenty-four 
railroad  lines  converged  at  St.  Louis,  not  a  single  one  passed 
through  the  city.  About  one  half  of  them  terminated  on  the 
east  bank  of  the  river,  which,  once  the  location  of  a  great  trade 
by  water,  had  now  become  an  obstacle  in  the  way  of  free  inter- 
course by  rail.  The  volume  of  traffic  at  this  point  was  enormous. 
It  was  impracticable  that  each  separate  road  should  have  its  own 
Mississippi  bridge.  The  cost  was  prohibitive.  And  ample  facili- 
ties could  be  provided,  as  in  fact  they  were,  only  by  associated  ac- 
tion. Besides  the  river  as  an  obstacle  to  passage,  the  location  of  the 
city  upon  hills  approaching  close  to  the  river  bank,  made  it  im- 
possible to  enter  the  municipal  limits  by  rail  from  the  west  ex- 
cept along  certain  well-defined  approaches.  In  order  to  cope 
with  these  physical  obstacles  at  St.  Louis,  two  separate  bridge 
corporations  and  a  ferry  line  cared  for  the  necessary  passage 

^224  U.  S.  383;   decided  April  22,  1912. 


496  TRUSTS,   POOLS   AND   CORPORATIONS 

over  the  Mississippi ;  while  certain  other  transfer  and  terminal 
companies  came  into  being  in  order  to  provide  the  necessary 
connections  into  town.  All  of  these  instrumentalities  in  the 
course  of  time  were  taken  over  by  the  Terminal  Railroad  Asso- 
ciation, organized  in  1889.  This  corporation,  in  turn,  was  not 
independent.  It  was  itself  controlled  by  a  nicely  balanced  and 
evenly  divided  stock  ownership  among  fifteen  trunk  lines.  The 
cause  of  complaint  was  the  alleged  inability  of  remaining  carriers, 
notably  the  Rock  Island,  to  obtain  the  most-favored-nation  treat- 
ment as  to  rates  and  facilities.  Admission  by  newcomers  was 
rendered  difficult  by  the  charter  requirement  of  a  unanimous 
consent  of  the  associated  lines.  It  was  complained  that  this 
entire  arrangement  was  inviolation  of  the  Anti-Trust  law,  and  in 
its  effect  was  contrary  to  the  public  interest. 

The  Supreme  Court  found  that  the  St.  Louis  Terminal  com- 
pany was  in  violation  of  the  law ;  and  undoubtedly  under  the 
earlier  interpretation  of  the  statute,  as  applied  in  the  pooling 
cases,  matters  would  necessarily  have  rested  at  that  point.  No 
alternative  but  dissolution  would  have  remained.  But  a  great 
advance  is  marked  in  the  added  qualification  that  "  the  violation 
of  the  statute  grows  out  of  administrative  conditions  which  may 
be  eliminated  and  the  obvious  advantage  of  unification  pre- 
served," in  such  a  manner  "  as  will  amply  vindicate  the  wise 
purpose  of  the  statute  and  will  preserve  to  the  public  a  system 
of  great  public  advantage.  In  other  words,  the  Supreme  Court 
of  the  United  States,  noting  the  economic  waste  and  the  expense 
and  inconvenience  to  the  public  which  would  result  from  a  dis- 
ruption of  this  cooperative  arrangement,  tempered  its  findings 
in  such  a  way  as  to  make  the  decision  in  reality  a  victory  at  once 
for  the  terminal  association,  the  railways  and  the  people.  Cer- 
tain modifications  of  organization  and  practice  were  prescribed, 
as  conditions  necessary  for  the  continued  lawfulness  of  the  ter- 
minal association.  Among  these  requirements  was  one  calhng 
for  the  admission  of  any  existing  or  future  railways  to  joint 
ownership  and  control ;  another  extended  the  facilities  of  the 
terminals  under  reasonable  terms  to  any  carriers  not  electing  to 
become  joint  owners  in  the  association ;  and  a  third  abrogated 
the  existing  restriction  of  the  proprietary  companies  to  the  use 


THE   SHERMAN    ACT  AND   THE    RAILROADS        497 

of  the  terminal  companies'  lines.  Over  and  abov^^these,  the 
Supreme  Court  called  for  the  discontinuance  of  certain  practices^ 
of  charging  an  "  arbitrary  "  for  trans-Mississippi  traffic  originating 
within  one  hundred  miles.  These  conditions,  however,  are  merely 
matters  of  detail.  Considerable  dispute  ensued  as  to  particulars. 
For  our  purposes  they  simply  serve  to  illustrate  the  manner  in 
which  a  penetrating  discernment  may  reconcile  the  financial  and 
operating  necessities  of  the  railroads  with  the  interest  of  the 
public,  in  the  perpetuation  of  such  competition  in  service  as  shall 
make  for  efficiency. 

Appraised  both  by  the  financial  magnitude  and  the  geographi- 
cal extent  of  the  interests  concerned,  the  proceedings  to  bring 
about  the  dissolution  of  the  Union  Pacific-Southern  Pacific 
merger  probably  outrank  any  other  test  likely  to  be  applied  to 
railroads  under  the  Sherman  Act.  This  combination  stood  for 
monopoly  to  the  third  power.  It  was  the  logical  climax  of  a 
tendency,  stayed  at  its  height  by  the  stern  hand  of  the  law.  A 
repetition  of  the  facts  is  unnecessary  in  view  of  their  extended  state- 
ment heretofore.  Official  proceedings  began  with  the  original 
report  of  the  Interstate  Commerce  Commission  in  1906.  The 
dissolution  suit,  prosecuted  for  five  years,  resulted  unexpectedly 
enough  in  an  opinion  by  the  Circuit  Court  unqualifiedly  adverse 
to  the  government.  Two  justices  held  that  the  Union  Pacific 
and  the  Southern  Pacific  were  connecting  and  only  incidentally 
competing  fines.  The  third  judge  dissented  from  this  view.  The 
case  then  went  on  appeal  to  the  Supreme  Court.  The  final 
opinion,^  considering  the  voluminous  record,  was  surprisingly 
brief.  Nor  did  it  differ  from  other  recent  pronouncements,  in 
confining  attention  largely  to  economic  fact  in  preference  to 
legal  doctrine.  For  the  occasion  called  merely  for  the  applica- 
tion of  predetermined  law  to  an  elaborate  set  of  material  cir- 
cumstances. Three  questions  called  for  answer,  (i)  Was  there 
competition  between  the  constituent  railroads  in  the  Harriman 
system  prior  to  its  formation.?  (2)  Did  the  merger  eliminate 
such  competition,  assuming  that  it  had  existed  ?  (3)  If  there  had 
been  competition,  and  it  had  ceased,  was  its  suppression  brought 

1  226  U.  S.  61;    decicied  Dec.  2,  1912. 


498  TRUSTS,    POOLS  AND   CORPORATIONS 

about  by  unlawful  means  ?  An  affirmative  answer  to  these  three 
queries  was  essential  to  the  government's  success.^ 

A  notable  feature  of  the  Union  Pacific  dissolution,  which 
marks  a  distinct  advance  over  its  predecessors,  was  the  care  be- 
stowed upon  the  segregation  of  the  great  properties  concerned. 
The  government  had  not  been  altogether  successful  in  its 
mandates  heretofore.  The  Northern  Securities  dissolution  was 
merely  formal.^  The  Standard  Oil  proceedings  were  entirely 
farcical.  Some  improvement  marks  the  Tobacco  Trust  segre- 
gation, inasmuch  as  its  complex  organization  forbade  so  naive 
a  decree  in  relief.  The  remedy  prescribed  in  the  St.  Louis 
Terminal  case  was  for  the  first  time  really  constructive.  The 
delicacy  of  adjustment  requisite  in  the  Union  Pacific  affair  is 
exhibited  by  the  complications  which  attended  the  various  plans 
worked  out  in  this  instance.  There  were  no  less  than  four  of 
these.^ 

The  first  dissolution  plan  proposed  to  distribute  the  Union 
Pacific's  entire  holdings  of  1,266,500  shares  of  Southern  Pacific 
common  stock  among  its  own  shareholders  gratis.  This  was 
vetoed  by  the  Supreme  Court,  on  the  very  proper  ground  that 
it  would  leave  control  in  exactly  the  same  hands  as  before, 
except  that  such  control  would  be  exercised  through  the  medium 
of  private  persons,  —  dominant  stockholders  of  the  Union 
Pacific*  This  was  precisely  what  happened  with  the  Standard 
Oil  Company.  The  second  plan  likewise  came  to  grief.  It 
proposed :  first,  a  sale  of  Southern  Pacific  stock,  under  privi- 
leged conditions,  to  all  shareholders  both  of  the  Union  Pacific 
and  Southern  Pacific  companies,  except,  of  course,  to  the  Union 
Pacific  corporation  or  the  Oregon  Short  Line  company ;  and, 
secondly,  with  funds  thus  acquired,  an  outright  purchase  by 
the  Union  Pacific  from  the  Southern  Pacific  of  the  Central 
Pacific  link.  A  number  of  obstacles  speedily  developed.  Con- 
flicting stipulations  in  the  indenture  of  bond  issues  stood  in  the 

1  These  details  are  admirably  reviewed  by  Daggett  in  the  Quarterly  Journal  of 
Economics,  vol.  XXVII,  1913,  pp.  295-328,  reprinted  in  our  Railway  Problems 
(rev.  ed.),  chapter  XXII. 

-  Condemned  by  the  dissenting  opinion,  193  U.  S.  373. 

3  Quarterly  Jour7ial  of  Economics,  vol.  XXVIII,  1914,  pp.  772-794. 

*  226  U.  S.  470. 


THE    SHERMAN    ACT   AND   THE    RAILROADS        499 

way.  An  almost  hopeless  physical  entanglement-wf  the  two 
properties  had  grown  up  in  the  course  of  time.  Thus,  on  San 
Francisco  bay  one  company  owned  the  piers,  another  the  ap- 
proaches and  a  third  the  ferry.  But  the  greatest  objection 
came  from  the  aroused  public  sentiment  of  California,  which 
through  its  railroad  commission  insisted  upon  the  continuance 
of  actual  competition  at  all  points.  Thus  the  advantage  of  this 
plan  to  the  Union  Pacific,  in  that  it  would  give  the  long-desired 
access  over  its  own  rails  to  the  coast  —  its  alleged  motive  for 
originally  taking  over  the  Southern  Pacific,  be  it  remembered 
—  was  denied. 

A  third  scheme  was  then  evolved,  quite  different  in  principle. 
All  the  Southern  Pacific  shares  were  to  be  distributed  pro  rata 
among  the  Union  Pacific  stockholders,  as  by  the  first  plan,  but 
such  disposition  was  to  be  coupled  with  disfranchisement  for 
all  purposes  of  control,  of  all  holders  of  1000  shares  or  over. 
A  trustee  was  to  issue  certificates  of  interest  upon  deposit  of 
all  Southern  Pacific  shares  held  by  the  Union  Pacific,  which 
were  to  carry  no  voting  rights  while  so  held,  and  which  should 
be  exchangeable  for  actual  Southern  Pacific  shares  only  on 
afifidavit  that  the  applicant  for  exchange  held  less  than  1000 
shares.  This  plan  would  exclude  368  selected  private  share- 
holders from  further  increase  of  their  holdings,  and  would  thus 
appear  to  have  been  of  doubtful  legality. 

The  final  plan  adopted  in  July  was  entirely  different  in  many 
ways.  It  aimed  to  dissolve  another  similar  control  by  the 
Pennsylvania  Railroad  of  a  competing  line,  by  substituting  in 
each  case  control  or  at  least  a  dominant  interest  in  merely  a 
connecting  line.  The  Pennsylvania  exchanged  212,737  Pre- 
ferred shares  at  $80  and  212,736  common  shares  at  par  of  the 
Baltimore  &  Ohio  Railroad  with  the  Union  Pacific  system  for 
its  382,924  shares  of  the  Southern  Pacific  at  par.  This  left 
the  Union  Pacific  with  a  balance  of  883,576  shares  of  Southern 
Pacific  stock,  which  balance  it  was  authorized  by  the  Court  to 
distribute  to  the  extent  of  27  per  cent  of  their  then  holdings 
among  the  other  general  shareholders  of  its  own  company. 
The  expedient  of  issuance  of  certificates  of  interest  by  a  trustee 
to  be  exchanged  for  actual  stock  upon  affidavit  that  purchase 


500  TRUSTS,    POOLS   AND    CORPORATIONS 

was  made  in  good  faith  on  his  own  behalf,  independently  of  the 
Union  Pacific  interests,  was  borrowed  from  the  preceding  plan. 
The  price  of  such  privileged  subscription  was  made  so  favorable 
that  the  certificates  when  offered  were  subscribed  for  two  and 
one-half  times  over.  The  final  step  was  the  distribution  of 
the  Baltimore  &  Ohio  stock  as  a  dividend  to  Union  Pacific 
shareholders.  Disregarding  details,  this  amounted  to  about 
$89,000,000,  the  greater  part  of  which  was  the  profit  made  by- 
fortunate  investments  in  railroads  elsewhere.^  This  last  plan, 
it  will  be  observed,  differed  from  the  first  two,  in  that  it  left 
the  Central  Pacific  link  to  the  coast  still  in  the  hands  of  the 
Southern  Pacific.  But  this  feature,  held  by  the  outgoing 
Administration  as  essential,  was  not  emphasized  by  the  new 
Democratic  attorney-general;  and  as  for  the  Union  Pacific, 
it  was  deemed  that  a  traffic  alliance  with  the  Central  Pacific 
providing  for  a  through  route  and  most-favored  treatment  as 
to  facilities  for  interchange  —  guaranteed  in  any  event  by  the 
significant  clause  upon  the  subject  in  the  Hepburn  law  of  1906 
—  would  in  some  ways  be  preferable  to  ownership.  It  would 
be  more  elastic  and  would,  moreover,  as  a  detail  of  interstate 
commerce,  be  free  from  interference  by  the  railroad  commis- 
sions of  the  states  concerned.  Such  a  traffic  agreement  would 
also  insure  to  the  Union  Pacific  a  due  share  of  east-bound  busi- 
ness, which  otherwise,  had  it  purchased  the  Central  Pacific, 
the  Southern  Pacific  might  choose  to  route  entirely  over  its 
own  long  line.  Thus  was  the  dissolution  brought  at  last  to  a 
successful  termination. 

The  arrangement  resulting  from  the  dissolution  of  the 
Harriman  system,  as  ultimately  put  through,  was  defective  in 
its  failure  to  fulfill  the  original  intention  of  Congress  to  en- 
courage by  liberal  land  grants  and  subsidies  the  construction 
of  the  first  transcontinental  railroad.  For  by  the  acts  of  1862- 
1864  it  was  provided  that  "the  whole  line  of  said  railroad  .  .  . 
shall  be  operated  and  used  for  all  purposes  of  communication 
...  so  far  as  the  public  and  Government  are  concerned,  as 
one  connected  continuous  line.'"  (Our  italics.)  So  long  as  the 
Central  Pacific  link  remained  in   the  hands    of   the   Southern 

1  Ripley,  Railroads  :  Finance  and  Organization,  chap.  XV. 


THE   SHERMAN    ACT   AND   THE    RAH.ROADS        501 

Pacific,  therefore,  the  primary  purpose  of  this  hi_^t^ric  legisla- 
tion was  thwarted.  Reconsideration  and  conviction  upon  this 
point  led  to  the  institution  of  another  suit  in  19 14  by  the  De- 
partment of  Justice,  this  time  to  compel  the  Southern  Pacific 
to  terminate  its  control  of  the  Central  Pacific.^  The  logic  and 
facts  of  the  situation  reenforced  the  contention  of  the  govern- 
ment that  the  public  interest,  particularly  of  the  Pacific  slope, 
would  be  promoted  by  this  means.  Competition  in  transporta- 
tion with  the  outside  world  is  and  has  always  been  the  supreme 
need  of  California.  Yet,  as  we  have  already  seen,  so  long  as 
the  Southern  Pacific  owned  a  continuous  water  and  rail  trans- 
continental line,  the  entire  earnings  of  which  it  retained  without 
pro-rating  division,  whereas  on  all  traffic  by  the  alternative 
direct  route  over  the  Central  Pacific  it  must  be  contented  with 
but  a  fraction  of  the  joint  through  rate,  just  so  long  was  it 
bound  to  encourage  the  southern  or  Sunset  Route  at  the  ex- 
pense of  the  other.  For  many  years,  to  be  sure,  it  exchanged 
much  business  with  the  Union  Pacific,  being  impelled  thereto 
by  the  desire  to  secure  reciprocal  advantages;  but  the  record  in 
the  original  Harriman  dissolution  proceedings  contains  much 
evidence  of  a  denial  of  the  equal  advantages  and  facilities 
called  for  by  the  Act  of  1 864  and  even  of  actual  discrimination 
against  its  own  link  in  the  direct  route  to  the  East. 

Were  the  Central  Pacific  to  be  set  free,  as  pointed  out  in  the 
government's  petition,  it  might  also,  by  recourse  to  but  little 
new  construction,  create  a  truly  competitive  line  between  San 
Francisco  and  Portland,  Oregon.  Yet  once  again  the  pending 
attempt  of  the  government  to  secure  for  the  Pacific  slope  the 
great  commercial  advantage  of  "one  connected  continuous 
line  "  was  opposed  by  certain  California  shippers.  They  pre- 
dicted that  the  loss  of  the  Central  Pacific  would  so  weaken  the 
Sunset  Route  as  to  unfit  it  for  effective  competition  in  future. 
In  gaining  a  better  direct  line  they  feared  crippling  the  round- 
about one.  The  advent  of  the  Panama  Canal  naturally  had  to 
be  reckoned  with.  In  the  past  the  Southern  Pacific  had  un- 
doubtedly been  restrained  somewhat  from  whole-hearted  com- 
petition with  the  all-water  lines,  lest  it  might  prejudice  thereby 

1  Original  Petitiun,  U.  S.  v.  So.  Fac,   U.  S.  Dist.  Court,  Utah,  etc. 


S02  TRUSTS,    POOLS   AND    CORPORATIONS 

its  considerable  investment  in  the  direct  route  via  Ogden. 
Nevertheless,  were  this  investment  to  be  closed  out,  was  it  not 
equally  possible  that  more,  rather  than  less,  vigorous  efforts 
might  be  made  to  tempt  traffic  from  the  sea  routes  to  the  all-rail 
line  ?  All  things  considered,  both  domestic  and  Oriental  busi- 
ness alike,  it  would  appear  as  if  the  probable  splitting  up  of  the 
Southern  Pacific  monopoly,  followed  perhaps  by  closer  rela- 
tions between  the  two  connecting  railroads  which  meet  at 
Ogden,  might  bring  to  pass  at  last,  after  the  lapse  of  half  a  cen- 
tury, a  direct  connected  continuous  line  between  East  and  West 
which  would  more  closely  bind  CaHfornia  to  the  rest  of  the 
United  States. 

Close  upon  the  heels  of  the  decree  calling  for  the  dissolution 
of  the  Harriman  system  followed  the  opinion  of  the  Supreme 
Court  with  reference  to  the  so-called  Anthracite  Coal  Trust.^ 
As  to  the  charge  that  a  general  combination  existed,  the  Court 
held  unanimously  that  the  case  was  "barren  of  documentary 
evidence  of  solidarity."  The  Court  declined,  in  other  words, 
to  base  an  opinion  upon  inference  which,  as  it  would  appear, 
was  sufficiently  plain ;  but  it  insisted  upon  the  proof  of  specific 
acts  or  transactions  in  pursuance  of  monopolistic  intent.  Yet 
the  conclusion  of  the  protracted  suits  was  not  entirely  disap- 
pointing. For  a  second  time  did  the  holding  company  come 
under  the  ban  of  the  law.  The  Temple  Iron  Company  was 
adjudged  to  be  an  unlawful  combination,  whereby  an  inde- 
pendent railroad  had  been  "strangled."  The  Court  also  di- 
rected a  cancellation  of  all  of  the  so-called  percentage  contracts, 
by  means  of  which  the  allied  coal  roads  had  sought  to  tie  the 
hands  of  independent  producers  in  perpetuity.  No  opinion 
was  expressed  regarding  the  legality  of  the  control  of  the 
Central  of  New  Jersey  by  the  Reading,  or  of  various  other 
similar  transactions.^  Some  advance  was  undoubtedly  made 
in  the  direction  of  liberating  the  people  of  the  United  States 
from  unjust  extortion ;  and  the  institution  of  additional    suits, 

1  226  U.  S.  324;  decided  Jan.  16,  1912.  Eliot  Jones,  op.  cit.,  p.  212  et  seq., 
outlines  the  course  of  this  litigation. 

^On  Oct.  28,  1915,  the  Central  of  New  Jersey  was  ordered  to  dispose  of  its  coal 
properties. 


THE   SHERMAN   ACT  AND   THE   RAH^ROADS        503 

still  pending,  holds  out  the  ho})e  that  more  may  yot^he  accom- 
plished in  due  time.  Whether  or  not  the  existing  informal 
understanding,  based  upon  the  mutual  self-interest  of  the  great 
coal  roads  concerned,  may  serve  as  effectively  as  formal  or 
contractual  arrangements,  which  are  clearly  ruled  out,  may  not 
yet  be  predicted  with  certainty.  A  satisfactory  solution  of  the 
anthracite  coal  problem  is  by  no  means  yet  in  sight. 

A  step  in  the  right  direction,  nevertheless,  is  taken  in  a  recent 
decision  of  the  Supreme  Court,^  which  in  the  case  of  the  Lack- 
awanna railroad,  holds  the  exclusive  contract  by  which  the  carrier 
and  the  coal  sales  company,  which  it  set  off  from  itself  in  1909, 
to  be  in  violation  both  of  the  Commodities  Clause^ and  the  Anti- 
Trust  law.  The  railroad  was  consequently  enjoined  from  trans- 
porting coal,  which  it  had  sold  to  the  sales  company.  What 
the  outcome  will  be,  remains  yet  to  be  seen. 

Our  record  as  to  railroads  under  the  Sherman  Act  concludes 
with  the  dissolution  of  the  great  New  England  transportation 
monopoly.  The  best  evidence  that  this  statute  is  now  rec- 
ognized as  a  vital  piece  of  legislation  is  afforded  by  the  fact 
that  in  this  instance  protracted  and  expensive  suits  were 
avoided  by  a  dissolution  agreement,  reached  in  conference 
between  the  New  Haven  and  the  Federal  Department  of  Jus- 
tice. Strong  pressure  undoubtedly  was  brought  to  bear. 
And  the  company  yielded,  not  because  the  illegality  of  its  com- 
bination was  conceded,  but  only  because  it  was  feared  that 
prolonged  litigation  might  precipitate  a  receivership.  It  will 
be  recalled  that  in  1908  the  Roosevelt  administration  had 
instituted  proceedings,  which  were  afterward  discontinued  by 
a  formal  agreement  between  the  President  and  the  New  Haven 
management  that  the  latter  would  thereafter  be  a  "  good " 
monopoly.  How  faithfully  this  promise  was  kept  has  already 
been  recited.  A  second  bill  of  complaint  praying  for  dissolu- 
tion brought  matters  to  a  head  in  19 14,  only  to  be  withdrawn 
upon  a  formal  agreement  providing  for  the  resolution  of  the 
system  into  its  component  parts. 

1  June  21,  1915;    35  Supreme  Court  Rep.  873. 

'■^  Ripley,  Railroads:    Rates  and  Regulation,  pp.  513  and  552. 


504  TRUSTS,    POOLS   AND   CORPORATIONS 

The  dissolution  plan  was    ofificially  summarized  as  follows  : 

First.  The  Boston  Railroad  Holding  Company  is  a  Massachusetts 
corporation  holding  a  majority  of  the  stock  of  the  Boston  &  Maine 
Railroad,  and  90  per  cent  of  the  former's  stock  in  turn  is  owned  by 
the  New  Haven  railroad.  The  charter  of  the  holding  company  pro- 
hibits it  from  disposing  of  the  Boston  &  Maine  stock.  The  legislature 
of  Massachusetts  will  be  asked  to  remove  this  prohibition,  and  if  this 
is  done  the  stock  of  the  holding  company  will  be  transferred  at  once 
to  five  trustees,  and,  after  arrangements  have  been  made  to  protect 
the  minorit}^  stock  of  the  holding  company,  they  shall  sell  the  Boston  & 
Maine  stock  prior  to  January  i,  1917. 

Second.  The  stocks  of  the  companies  which  control  the  Connecticut 
and  Rhode  Island  trolleys  will  be  placed  in  the  hands  of  trustees  — 
five  for  each  state  —  and  shall  be  sold  within  five  years  from  July  i, 
1914. 

Third.  The  majority  stock  of  the  Merchants  &  Miners  Trans- 
portation Company,  now  held  by  the  New  Haven,  wall  be  placed  in 
the  hands  of  three  trustees  and  shall  be  sold  within  three  years  from 
July  I,  1 9 14. 

Fourth.  The  minority  stock  in  the  Eastern  Steamship  Corporation, 
held  by  the  New  Haven,  shall  be  sold  within  three  years  from  July  i, 
19 1 4,  and  in  the  meantime  shall  be  deprived  of  voting  power. 

Fifth.  Whether  the  New  Haven  Railroad  shall  be  permitted  to 
retain  the  sound  lines  will  be  submitted  to  the  Interstate  Commerce 
Commission  for  determination  under  the  provisions  of  the  Panama 
Canal  act. 

Sixth.  The  Berkshire  trolleys  shall  be  sold  within  five  years  from 
July  I,  1914. 

The  financial  magnitude  of  this  operation  is  exhibited  by  the 
following  table  of  the  book  value  of  the  various  investments  of 
the  New  Haven  system.  The  principal  lesson  to  be  deduced 
from  this  case  is  the  force  of  public  opinion  acting  through  law 
to  bring  a  once  insolent  and  corruptly  powerful  corporation 
under  restraint.  The  obligation  henceforth  rests  upon  the 
people  to  exercise  this  power  constructively  in  the  interest  of 
all  parties  concerned.  It  is  by  no  means  certain  that  all,  or  even 
many,  of  the  units  in  the  New  Haven  system  were  really  com- 
peting rather  than  merely  supplementary  lines;  still  less  that  the 
welfare  of  New  England  will  be  promoted  by  a  rigid  insistence 


THE   SHKRMAN    ACT   AND   THE    RAU. ROADS         505 

upon  corporate  disruption.  Could  the  matter  havejiccn  brought 
to  a  test  as  to  its  legality,  as  would  surely  have  happened  under 
more  auspicious  financial  circumstances,  some  very  pretty 
transportation  problems  would  have  come  to  light. 

As  Cakried  on  Books  of 

^_       ,,  New  England 

New  Haven  Navigation 

Company  Company 

Boston  Railroad  Holding  Company $29,371,165.97 

Boston  &  Maine  R.R.  subsidiary  lines 1,417,216.95 

The  Connecticut  Company 2,125,000.00    $40,000,000.00 

The  Rhode  Island  Company 27,852,336.41        1,266,379.37 

Berkshire  Street  Railway  Company 9.809,395.58 

The  Vermont  Company 1,477,164.31 

Eastern  Steamship  Company 4,200,000.00 

New  York  &  Stamford  Railway 1,395,523.40 

The  Westchester  Street  Railroad 1,152,150.84 

Shore  Line  Electric  Railroad 117,000.00 

New  England  Investment  and  Security  Company      .  13,631,750.00 

^74>599.953-46  $59,215,129.37 

The  true  purpose  of  a  statute  is  not  punishment  but  the 
prevention  of  evil.  When  the  force  of  a  lavir  has  become  so 
fully  recognized  that  voluntary  submission  to  it  replaces  re- 
calcitrancy, its  main  purpose  has  been  accompHshed.  Action 
in  other  parts  of  the  country  bears  witness  to  conviction  upon 
this  point.  The  Missouri,  Kansas  &  Texas  in  19 14,  like  the 
New  Haven,  came  -to  an  agreement  under  which  a  suit  under 
the  Anti-Trust  law  of  Texas  was  withdrawn  under  promise  of 
good  behavior.  This  paved  the  way  for  the  railroad  to  reha- 
bilitate and  even  to  consolidate  its  properties  lawfully.  The 
withdrawal  from  the  anthracite  coal  combination  of  the  Penn- 
sylvania Railroad ;  its  disposition  of  investments  in  competing 
trunk  lines  ;  the  consoHdation  policy  of  the  New  York  Central ; 
the  close  scrutiny  to  which  intercorporate  relations  are  every- 
where else  being  subjected;  all  alike  demonstrate  that  the 
avowed  purpose  of  the  people  to  perpetuate  railroad  competi- 
tion is  accepted  as  an  established  fact. 


XVI 

EARLY   SUPREME   COURT    DECISIONS:  1890-1901 

THE    KNIGHT   CASE  1 

THE  material  facts  proved  are  that  the  American  Sugar  Re- 
fining Company,  one  of  the  defendants,  is  incorporated 
under  laws  of  New  Jersey,  and  has  authority  to  purchase,  refine, 
and  sell  the  sugar ;  that  the  Franklin  Sugar  Refinery,  the  E.  C. 
Knight  Company,  the  Spreckels  Sugar  Refinery,  and  the  Dela- 
ware Sugar  House,  were  incorporated  under  the  laws  of  Pennsyl- 
vania, and  authorized  to  purchase,  refine,  and  sell  sugar ;  that 
the  four  latter  Pennsylvania  companies  were  located  in  Phila- 
delphia, and,  prior  to  March,  1892,  produced  about  thirty-three 
per  cent  of  the  total  amount  of  sugar  refined  in  the  United 
States,  and  were  in  active  competition  with  the  American  Sugar 
Refining  Company,  and  with  each  other,  selling  their  product 
wherever  demand  was  found  for  it  throughout  the  United 
States;  that  prior  to  March,  1892,  the  American  Sugar  Refin- 
ing Company  had  obtained  control  of  all  refineries  in  the  United 
States,  excepting  the  four  located  in  Philadelphia,  and  that  of 
the  Revere  Company  in  Boston,  the  latter  producing  about  two 
per  cent  of  the  amount  refined  in  this  country  ;  that  in  March, 
1892,  the  American  Sugar  Refining  Company  entered  into  con- 
tracts (on  different  dates)  with  the  stockholders  of  each  of  the 
Philadelphia  corporations  named,  whereby  it  purchased  their 
stock,  paying  therefor  by  transfers  of  stock  in  its  company ; 
that  the  American  Sugar  Refining  Company  thus  obtained  pos- 
session of  the  Philadelphia  refineries  and  their  business  ;  that 
each  of  the  purchases  was  made  subject  to  the  American  Sugar 

1  U.  S.v.  E.  C.   Knight  Co.,   156  U.  S.   i ;   Supreme  Court  Reporter,   249;   de- 
cided March  26,  1894. 

506 


EARLY   SUPREME    COURT    DECISIONS:    1890-1901        507 

Refining  Company  obtaining  authority  to  increase  its  stock 
^25,000,000;  that  this  assent  was  subsequently  obtained,  and 
the  increase  made  ;  that  there  was  no  understanding  or  concert 
of  action  between  the  stockholders  of  the  several  Philadelphia 
companies  respecting  the  sales,  but  that  those  of  each  company 
acted  independently  of  those  of  the  others,  and  in  ignorance  of 
what  was  being  done  by  such  others ;  that  the  stockholders  of 
each  company  acted  in  concert  with  each  other,  understanding 
and  intending  that  all  the  stock  and  property  of  the  company 
should  be  sold ;  that  the  contract  of  sale  in  each  instance  left 
the  sellers  free  to  establish  other  refineries,  and  continue  the 
business  if  they  should  see  fit  to  do  so,  and  contained  no  pro- 
vision respecting  trade  or  commerce  in  sugar,  and  that  no  ar- 
rangement or  provision  on  this  subject  has  been  made  since ; 
that  since  the  purchase  the  Delaware  Sugar  House  Refinery  has 
been  operated  in  conjunction  with  the  Spreckels  Refinery,  and 
the  E.  C.  Knight  Refinery  in  connection  with  the  Franklin,  this 
combination  being  made  apparently  for  reasons  of  economy  in 
conducting  the  business ;  that  the  amount  of  sugar  refined  in 
Philadelphia  has  been  increased  since  the  purchases ;  that  the 
price  has  been  slightly  advanced  since  that  event,  but  is  still 
lower  than  it  had  been  for  some  years  before,  and  up  to  within 
a  few  months  of  the  sales ;  that  about  ten  per  cent  of  the  sugar 
refined  and  sold  in  the  United  States  is  refined  in  other  re- 
fineries than  those  controlled  by  the  American  Sugar  Refining 
Company;  that  some  additional  sugar  is  produced  in  Louisiana 
and  some  is  brought  from  Europe,  but  the  amount  is  not  large 
in  either  instance. 

The  object  in  purchasing  the  Philadelphia  refineries  was  to 
obtain  a  greater  influence  or  more  perfect  control  over  the  busi- 
ness of  refining  and  selling  sugar  in  this  country. 

The  circuit  court  held  that  the  facts  did  not  show  a  contract, 
combination,  or  conspiracy  to  restrain  or  monopolize  trade  or 
commerce  "  among  the  several  states  or  with  foreign  nations," 
and  dismissed  the  bill.  60  Fed.  306.  The  cause  was  taken  to 
the  circuit  court  of  appeals  for  the  Third  circuit,  and  the  decree 
affirmed.  9  C.  C.  A.  297,  60  Fed.  934.  This  appeal  was 
then  prosecuted. 


5o8  TRUSTS,    POOLS   AND   CORPORATIONS 

Mr.  Chief  Justice  Fuller,  after  stating  the  facts  in  the  fore- 
going language,  delivered  the  opinion  of  the  court. 

By  the  purchase  of  the  stock  of  the  four  Philadelphia  refiner- 
ies with  shares  of  its  own  stock  the  American  Sugar  Refining 
Company  acquired  nearly  complete  control  of  the  manufacture 
of  refined  sugar  within  the  United  States.  The  bill  charged 
that  the  contracts  under  which  these  purchases  were  made  con- 
stituted combinations  in  restraint  of  trade,  and  that  in  entering 
into  them  the  defendants  combined  and  conspired  to  restrain 
the  trade  and  commerce  in  reiined  sugar  among  the  several 
states  and  with  foreign  nations,  contrary  to  the  act  of  congress 
of  July  2,  1890. 

The  relief  sought  was  the  cancellation  of  the  agreements 
under  which  the  stock  was  transferred,  the  redelivery  of  the 
stock  to  the  parties  respectively,  and  an  injunction  against  the 
further  performance  of  the  agreements  and  further  violations 
of  the  act.  As  usual,  there  was  a  prayer  for  general  relief,  but 
only  such  relief  could  be  afforded  under  that  prayer  as  would 
be  agreeable  to  the  case  made  by  the  bill  and  consistent  with 
that  specifically  prayed.  And  as  to  the  injunction  asked,  that 
relief  was  ancillary  to  and  in  aid  of  the  primary  equity,  or 
ground  of  suit,  and  if  that  failed,  would  fall  with  it.  That 
ground  here  was  the  existence  of  contracts  to  monopolize  inter- 
state or  international  trade  or  commerce,  and  to  restrain  such 
trade  or  commerce  which,  by  the  provisions  of  the  act,  could  be 
rescinded,  or  operations  thereunder  arrested. 

In  commenting  upon  the  statute  (21  Jac.  I.  c.  3),  at  the  com- 
mencement of  chapter  85  of  the  third  institute,  entitled  "  Against 
Monopolists,  Propounders,  and  Projectors,"  Lord  Coke,  in  lan- 
guage often  quoted,  said  : 

It  appeareth  by  the  preamble  of  this  act  (as  a  judgment  in  parlia- 
ment) that  all  grants  of  monopolies  are  against  the  ancient  and  funda- 
mental! laws  of  this  kingdome.  And  therefore  it  is  necessary  to 
define  what  a  monopoly  is. 

A  monopoly  is  an  institution,  or  allowance  by  the  king  by  his  grant, 
commission,  or  otherwise  to  any  person  or  persons,  bodies  politique, 
or  corporate,  of  or  for  the  sole  buying,  selling,  making,  working,  or 
using  of  anything,  whereby  any  person  or  persons,  bodies  politique,  or 


EARLY   SUPREME    COURT   DECISIONS:    1 890-1901       509 

corporate,  are  sought  to  be  restrained  of  any  freedomejii:.  liberty  that 
they  had  before,  or  hindred  in  their  lawful!  trade. 

Counsel  contend  that  this  definition,  as  explained  by  the 
derivation  of  the  word,  may  be  applied  to  all  cases  in  which 
"  one  person  sells  alone  the  whole  of  any  kind  of  marketable 
thing,  so  that  only  he  can  continue  to  sell  it,  fixing  the  price  at 
his  own  pleasure,"  whether  by  virtue  of  legislative  grant  or 
agreement ;  that  the  monopolization  referred  to  in  the  act  of 
congress  is  not  confined  to  the  common-law  sense  of  the  term 
as  implying  an  exclusive  control,  by  authority,  of  one  branch  of 
industry  without  legal  right  of  any  other  person  to  interfere 
therewith  by  competition  or  otherwise,  but  that  it  includes  en- 
grossing as  well,  and  covers  controlling  the  market  by  contracts 
securing  the  advantage  of  selling  alone  or  exclusively  all,  or 
some  considerable  portion,  of  a  particular  kind  of  merchandise 
or  commodity  to  the  detriment  of  the  public ;  and  that  such  con- 
tracts amount  to  that  restraint  of  trade  or  commerce  declared  to  be 
illegal.  But  the  monopoly  and  restraint  denounced  by  the  act 
are  the  monopoly  and  restraint  of  interstate  and  international 
trade  or  commerce,  while  the  conclusion  to  be  assumed  on  this 
record  is  that  the  result  of  the  transaction  complained  of  was  the 
creation  of  a  monopoly  in  the  manufacture  of  a  necessary  of 
life. 

In  the  view  which  we  take  of  the  case,  we  need  not  discuss 
whether,  because  the  tentacles  which  drew  the  outlying  re- 
fineries into  the  dominant  corporation  were  separately  put  out, 
therefore  there  was  no  combination  to  monopolize ;  or  because, 
according  to  political  economists,  aggregations  of  capital  may 
reduce  prices,  therefore  the  objection  to  concentration  of  power 
is  relieved  ;  or,  because  others  were  theoretically  left  free  to  go 
into  the  business  of  refining  sugar,  and  the  original  stockholders 
of  the  Philadelphia  refineries,  after  becoming  stockholders  of 
the  American  company,  might  go  into  competition  with  them- 
selves, or,  parting  with  that  stock,  might  set  up  again  for  them- 
selves, therefore  no  objectionable  restraint  was  imposed. 

The  fundamental  question  is  whether,  conceding  that  the 
existence  of  a  monopoly  in  manufacture  is  established  by  the 


5IO  TRUSTS,   POOLS  AND  CORPORATIONS 

evidence,    that    monopoly    can    be    directly    suppressed    under 
the  act  of  congress  in  the  mode  attempted  by  this  bill. 

It  cannot  be  denied  that  the  power  of  a  state  to  protect  the 
lives,  health,  and  property  of  its  citizens,  and  to  preserve  good 
order  and  the  public  morals,  "  the  power  to  govern  men  and 
things  within  the  limits  of  its  dominion,"  is  a  power  originally 
and  always  belonging  to  the  states,  not  surrendered  by  them 
to  the  general  government,  nor  directly  restrained  by  the  con- 
stitution of  the  United  States,  and  essentially  exclusive.  The 
relief  of  the  citizens  of  each  state  from  the  burden  of  monopoly 
and  the  evils  resulting  from  the  restraint  of  trade  among  such 
citizens  was  left  with  the  states  to  deal  with,  and  this  court  has 
recognized  their  possession  of  that  power  even  to  the  extent  of 
holding  that  an  employment  or  business  carried  on  by  private 
individuals,  when  it  becomes  a  matter  of  such  public  interest 
and  importance  as  to  create  a  common  charge  or  burden  upon 
the  citizen,  —  in  other  words,  when  it  becomes  a  practical  monop- 
oly, to  which  the  citizen  is  compelled  to  resort,  and  by  means  of 
which  a  tribute  can  be  exacted  from  the  community, — is  sub- 
ject to  regulation  by  state  legislative  power.  On  the  other  hand, 
the  power  of  congress  to  regulate  commerce  among  the  several 
states  is  also  exclusive.  The  constitution  does  not  provide  that 
interstate  commerce  shall  be  free,  but,  by  the  grant  of  this  ex- 
clusive power  to  regulate  it,  it  was  left  free,  except  as  congress 
might  impose  restraints.  Therefore  it  has  been  determined  that 
the  failure  of  congress  to  exercise  this  exclusive  power  in  any 
case  is  an  expression  of  its  will  that  the  subject  shall  be  free 
from  restrictions  or  impositions  upon  it  by  the  several  states, 
and  if  a  law  passed  by  a  state  in  the  exercise  of  its  acknowl- 
edged powers  comes  into  conflict  with  that  will,  the  congress 
and  the  state  cannot  occupy  the  position  of  equal  opposing 
sovereignties,  because  the  constitution  declares  its  supremacy, 
and  that  of  the  laws  passed  in  pursuance  thereof;  and  that 
which  is  not  supreme  must  yield  to  that  which  is  supreme. 
"Commerce  undoubtedly  is  traffic,"  said  Chief  Justice  Marshall, 
"but  it  is  something  more;  it  is  intercourse.  It  describes  the 
commercial  intercourse  between  nations  and  parts  of  nations  in 
all  its  branches,  and  is  regulated  by  prescribing  rules  for  carry- 


EARLY   SUPREME   COURT    DECISIONS:    1890-1901       511 

ing  on  that  intercourse."  That  which  belongs  to^emmcrce  is 
within  the  jurisdiction  of  the  United  States,  but  that  which  does 
not  belong  to  commerce  is  within  the  jurisdiction  of  the  police 
power  of  the  state. 

The  argument  is  that  the  power  to  control  the  manufacture 
of  refined  sugar  is  a  monopoly  over  a  necessary  of  life,  to  the 
enjoyment  of  which  by  a  large  part  of  the  population  of  the 
United  States  interstate  commerce  is  indispensable,  and  that, 
therefore,  the  general  government,  in  the  exercise  of  the  power 
to  regulate  commerce,  may  repress  such  monopoly  directly,  and 
set  aside  the  instruments  which  have  created  it.  But  this  argu- 
ment cannot  be  confined  to  necessaries  of  life  merely,  and  must 
include  all  articles  of  general  consumption.  Doubtless  the 
power  to  control  the  manufacture  of  a  given  thing  involves,  in 
a  certain  sense,  the  control  of  its  disposition,  but  this  is  a  sec- 
ondary, and  not  the  primary,  sense;  and,  although  the  exercise 
of  that  power  may  result  in  bringing  the  operation  of  commerce 
into  play,  it  does  not  control  it,  and  affects  it  only  incidentally 
and  indirectly.  Commerce  succeeds  to  manufacture,  and  is  not 
a  part  of  it.  The  power  to  regulate  commerce  is  the  power  to 
prescribe  the  rule  by  which  commerce  shall  be  governed,  and  is 
a  power  independent  of  the  power  to  suppress  monopoly.  But 
it  may  operate  in  repression  of  monopoly  whenever  that  comes 
within  the  rules  by  which  commerce  is  governed,  or  whenever 
the  transaction  is  itself  a  monopoly  of  commerce. 

It  is  vital  that  the  independence  of  the  commercial  power  and 
of  the  police  power,  and  the  delimitation  between  them,  how- 
ever sometimes  perplexing,  should  always  be  recognized  and 
observed,  for,  while  the  one  furnishes  the  strongest  bond  of 
union,  the  other  is  essential  to  the  preservation  of  the  autonomy 
of  the  states  as  required  by  our  dual  form  of  government ;  and 
acknowledged  evils,  however  grave  and  urgent  they  may  appear 
to  be,  had  better  be  borne,  than  the  risk  be  run,  in  the  effort  to 
suppress  them,  of  more  serious  consequences  by  resort  to  ex- 
pedients of  even  doubtful  constitutionality. 

It  will  be  perceived  how  far-reaching  the  proposition  is  that 
the  power  of  dealing  with  a  monopoly  directly  may  be  exercised 
by  the  general  government  whenever  interstate  or  international 


512  TRUSTS,   POOLS   AND   CORPORATIONS 

commerce  may  be  ultimately  affected.  The  regulation  of  com- 
merce applies  to  the  subjects  of  commerce,  and  not  to  matters 
of  internal  police.  Contracts  to  buy,  sell,  or  exchange  goods 
to  be  transported  among  the  several  states,  the  transporta- 
tion and  its  instrumentalities,  and  articles  bought,  sold,  or  ex- 
changed for  the  purposes  of  such  transit  among  the  states,  or 
put  in  the  way  of  transit,  may  be  regulated ;  but  this  is  because 
they  form  part  of  interstate  trade  or  commerce.  The  fact  that 
an  article  is  manufactured  for  export  to  another  state  does  not 
of  itself  make  it  an  article  of  interstate  commerce,  and  the  in- 
tent of  the  manufacturer  does  not  determine  the  time  when  the 
article  or  product  passes  from  the  control  of  the  state  and  be- 
longs to  commerce.  This  was  so  ruled  in  Coe  v.  Errol,  Ii6 
U.  S.  517,  6  Sup.  Ct.  475,  in  which  the  question  before  the  court 
was  whether  certain  logs  cut  at  a  place  in  New  Hampshire,  and 
hauled  to  a  river  town  for  the  purpose  of  transportation  to  the 
state  of  Maine,  were  Hable  to  be  taxed  like  other  property  in 
the  state  of  New  Hampshire.  Mr.  Justice  Bradley,  delivering 
the  opinion  of  the  court,  said  : 

Does  the  owner's  state  of  mind  in  relation  to  the  goods — that  is, 
his  intent  to  export  them,  and  his  partial  preparation  to  do  so  —  ex- 
empt them  from  taxation?  This  is  the  precise  question  for  solution. 
.  .  .  There  must  be  a  point  of  time  when  they  cease  to  be  governed 
exclusively  by  the  domestic  law,  and  begin  to  be  governed  and  pro- 
tected by  the  national  law  of  commercial  regulation  ;  and  that  moment 
seems  to  us  to  be  a  legitimate  one  for  this  purpose  in  which  they  com- 
mence their  final  movement  from  the  state  of  their  origin  to  that  of 
their  destination. 

And  again,  in  Kiddy.  Pearson,  128  U.  S.  i,  20,  24,  9  Sup. 
Ct.  6,  where  the  question  was  discussed  whether  the  right  of  a 
state  to  enact  a  statute  prohibiting  within  its  limits  the  manu- 
facture of  intoxicating  liquors,  except  for  certain  purposes,  could 
be  overthrown  by  the  fact  that  the  manufacturer  intended  to 
export  the  liquors  when  made,  it  was  held  that  the  intent  of  the 
manufacturer  did  not  determine  the  time  when  the  article  or 
product  passed  from  the  control  of  the  state  and  belonged  to 
commerce,  and  that,  therefore,  the  statute,  in  omitting  to  except 


EARLY   SUPREME    COURT    DECISIONS:    1890-1901     513 

from  its  operation  the  manufacture  of  intoxicating  liquors  within 
the  limits  of  the  state  for  export,  did  not  constitute  an  unauthor- 
ized interference  with  the  right  of  congress  to  regulate  com- 
merce.    And  Mr.  Justice  Lamar  remarked: 

No  distinction  is  more  popular  to  the  common  mind,  or  more 
clearly  expressed  in  economic  and  political  literature,  than  that  be- 
tween manufacture  and  commerce.  Manufacture  is  transformation, — 
the  fashioning  of  raw  materials  into  a  change  of  form  for  use.  The 
functions  of  commerce  are  different.  The  buying  and  selling,  and 
the  transportation  incidental  thereto,  constitute  commerce  :  and  the 
regulation  of  commerce  in  the  constitutional  sense  embraces  the  regu- 
lation at  least  of  such  transportation.  ...  If  it  be  held  that  the  term 
includes  the  regulation  of  all  such  manufacturers  as  are  intended  to 
be  the  subject  of  commercial  transactions  in  the  future,  it  is  impos- 
sible to  deny  that  it  would  also  include  all  producti\e  industries  that 
contemplate  the  same  thing.  The  result  would  be  that  congress  would 
be  invested,  to  the  exclusion  of  the  states,  with  the  power  to  regulate, 
not  only  manufactures,  but  also  agriculture,  horticulture,  stock-rais- 
ing, domestic  fisheries,  mining ;  in  short,  every  branch  of  human  in- 
dustry. For  is  there  one  of  them  that  does  not  contemplate,  more  or 
less  clearly,  an  interstate  or  foreign  market  ?  Does  not  the  wheat 
grower  of  the  Northwest,  and  the  cotton  planter  of  the  South,  plant, 
cultivate,  and  harvest  his  crop  with  an  eye  on  the  prices  at  Liverpool, 
New  York,  and  Chicago  ?  The  power  being  vested  in  congress  and 
denied  to  the  states,  it  would  follow  as  an  inevitable  result  that  the 
duty  would  devolve  on  congress  to  regulate  all  of  these  delicate  mul- 
tiform, and  vital  interests,  —  interests  which  in  their  nature  are,  and 
must  be,  local  in  all  the  details  of  their  successful  management.  .  .  . 
The  demands  of  such  supervision  would  require,  not  uniform  legisla- 
tion generally  applicable  throughout  the  United  States,  but  a  swarm 
of  statutes  only  locally  applicable,  and  utterly  inconsistent.  Any 
movement  towards  the  establishment  of  rules  of  production  in  this 
vast  country,  with  its  many  diiferent  climates  and  opportunities,  would 
only  be  at  the  sacrifice  of  the  peculiar  advantages  of  a  large  part  of 
the  localities  in  it,  if  not  of  every  one  of  them.  On  the  other  hand, 
any  movement  towards  the  local,  detailed,  and  incongruous  legislation 
required  by  such  interpretation  would  be  about  the  widest  possible 
departure  from  the  declared  object  of  the  clause  in  question.  Nor 
this  alone.  Even  in  the  exercise  of  the  power  contended  for,  congress 
would  be  confined  to  the  regulation,  not  of  certain  branches  of  in- 


514  TRUSTS,    POOLS   AND   CORPORATIONS 

dustry,  however  numerous,  but  to  those  instances  in  each  and  every 
branch  where  the  producer  contemplated  an  interstate  market.  These 
instances  would  be  almost  infinite,  as  we  have  seen  ;  but  still  there 
would  always  remain  the  possibility,  and  often  it  would  be  the  case, 
that  the  producer  contemplated  a  domestic  market.  In  that  case  the 
supervisory  power  must  be  executed  by  the  state ;  and  the  intermin- 
able trouble  would  be  presented  that  whether  the  one  power  or  the 
other  should  exercise  the  authority  in  question  would  be  determined, 
not  by  any  general  or  intelligible  rule,  but  by  the  secret  and  change- 
able intention  of  the  producer  in  each  and  every  act  of  production. 
A  situation  more  paralyzing  to  the  state  governments,  and  more  pro- 
vocative of  conflicts  between  the  general  government  and  the  states, 
and  less  likely  to  have  been  what  the  framers  of  the  constitution  in- 
tended, it  would  be  difficult  to  imagine. 

And  see  Vca::ie  v.  Moor,  14  How.  568,  574. 

In  Gibbons  v.  Ogden,  Brown  v.  Maryland,  and  other  cases 
often  cited,  the  state  laws,  which  were  held  inoperative,  were 
instances  of  direct  interference  with,  or  regulations  of,  interstate 
or  international  commerce ;  yet  in  Kidd  v.  Pearson  the  refusal 
of  a  state  to  allow  articles  to  be  manufactured  within  her  borders, 
even  for  export,  was  held  not  to  directly  affect  external  com- 
merce ;  and  state  legislation  which,  in  a  great  variety  of  vi^ays, 
affected  interstate  commerce  and  persons  engaged  in  it,  has  been 
frequently  sustained  because  the  interference  was  not  direct. 

Contracts,  combinations,  or  conspiracies  to  control  domestic 
enterprise  in  manufacture,  agriculture,  mining,  production  in  all 
its  forms,  or  to  raise  or  lower  prices  or  wages,  might  unquestion- 
ably tend  to  restrain  external  as  well  as  domestic  trade,  but  the 
restraint  would  be  an  indirect  result,  however  inevitable,  and 
whatever  its  extent,  and  such  result  would  not  necessarily  de- 
termine the  object  of  the  contract,  combination,  or  conspiracy. 

Again,  all  the  authorities  agree  that,  in  order  to  vitiate  a  con- 
tract or  combination,  it  is  not  essential  that  its  result  should  be 
a  complete  monopoly;  it  is  sufficient  if  it  really  tends  to  that 
end,  and  to  deprive  the  pubHc  of  the  advantages  which  flow 
from  free  competition.  Slight  reflection  will  show  that,  if  the 
national  power  extends  to  all  contracts  and  combinations  in 
manufacture,  agriculture,  mining,  and  other  productive  Indus- 


EARLY   SUPREME  COURT    DECISIONS:    1890-1901      515 

tries,  whose  ultimate  result  may  affect  external  coiTntTcrce,  com- 
paratively little  of  business  operations  and  affairs  would  be  left 
for  state  control. 

It  was  in  the  light  of  well-settled  principles  that  the  act  of  July 
2,  1890,  was  framed.  Congress  did  not  attempt  thereby  to  assert 
the  power  to  deal  with  monopoly  directly  as  such  ;  or  to  limit  and 
restrict  the  rights  of  corporations  created  by  the  states  or  the 
citizens  of  the  states  in  the  acquisition,  control,  or  disposition  of 
property  ;  or  to  regulate  or  prescribe  the  price  or  prices  at  which 
such  property  or  the  products  thereof  should  be  sold ;  or  to 
make  criminal  the  acts  of  persons  in  the  acquisition  and  control 
of  property  which  the  states  of  their  residence  or  creation  sanc- 
tioned or  permitted.  Aside  from  the  provisions  applicable  where 
congress  might  exercise  municipal  power,  what  the  law  struck 
at  was  combinations,  contracts,  and  conspiracies  to  monopolize 
trade  and  commerce  among  the  several  states  or  with  foreign 
nations ;  but  the  contracts  and  acts  of  the  defendants  related 
exclusively  to  the  acquisition  of  the  Philadelphia  refineries  and 
the  business  of  sugar  refining  in  Pennsylvania,  and  bore  no 
direct  relation  to  commerce  between  the  states  or  with  foreign 
nations.  The  object  was  manifestly  private  gain  in  the  manu- 
facture of  the  commodity,  but  not  through  the  control  of  inter- 
state or  foreign  commerce.  It  is  true  that  the  bill  alleged  that 
the  products  of  these  refineries  were  sold  and  distributed  among, 
the  several  states,  and  that  all  the  companies  were  engaged  in 
trade  or  commerce  with  the  several  states  and  with  foreign 
nations ;  but  this  was  no  more  than  to  say  that  trade  and  com- 
merce served  manufacture  to  fulfill  its  function.  Sugar  was 
refined  for  sale,  and  sales  were  probably  made  at  Philadelphia 
for  consumption,  and  undoubtedly  for  resale  by  the  first  pur- 
chasers throughout  Pennsylvania  and  other  states,  and  refined 
sugar  was  also  forwarded  by  the  companies  to  other  states  for 
sale.  Nevertheless  it  does  not  follow  that  an  attempt  to  mo- 
nopolize, or  the  actual  monopoly  of,  the  manufacture  was  an 
attempt,  whether  executory  or  consummated,  to  monopolize  com- 
merce, even  though,  in  order  to  dispose  of  the  product,  the  in- 
strumentality of  commerce  was  necessarily  invoked.  There  was 
nothing  in  the  proofs  to  indicate  any  intention  to  put  a  restraint 


5i6  TRUSTS,    POOLS   AND    CORPORATIONS 

upon  trade  or  commerce,  and  the  fact,  as  we  have  seen,  that 
trade  or  commerce  might  be  indirectly  affected,  was  not  enough  to 
entitle  complainants  to  a  decree.  The  subject-matter  of  the  sale 
was  shares  of  manufacturing  stock,  and  the  relief  sought  was 
the  surrender  of  property  which  had  already  passed,  and  the 
suppression  of  the  alleged  monopoly  in  manufacture  by  the 
restoration  of  the  status  quo  before  the  transfers  ;  yet  the  act  of 
congress  only  authorized  the  circuit  courts  to  proceed  by  way 
of  preventing  and  restraining  violations  of  the  act  in  respect  of 
contracts,  combinations,  or  conspiracies  in  restraint  of  interstate 
or  international  trade  or  commerce. 

The  Circuit  Court  declined,  upon  the  pleadings  and  proofs,  to 
grant  the  rehef  prayed,  and  dismissed  the  bill,  and  we  are  of 
opinion  that  the  Circuit  Court  of  Appeals  did  not  err  in  affirming 
that  decree. 

Decree  affirmed. 

Mr.  Justice  Harlan^  dissenting. 

What  is  commerce  among  the  states .-'  The  decisions  of  this 
court  fully  answer  the  question.  "  Commerce,  undoubtedly,  is 
traffic,  but  it  is  something  more;  it  is  intercourse."  It  does  not 
embrace  the  completely  interior  traffic  of  the  respective  states, — 
that  which  is  "  carried  on  between  man  and  man  in  a  state,  or 
between  different  parts  of  the  same  state,  and  which  does  not 
extend  to  or  affect  other  states,"  — but  it  does  embrace  "every 
species  of  commercial  intercourse  "  between  the  United  States 
and  foreign  nations  and  among  the  states,  and  therefore  it  includes 
such  traffic  or  trade,  buying,  selling,  and  interchange  of  com- 
modities, as  directly  affects  or  necessarily  involves  the  interests 
of  the  people  of  the  United  States.  "  Commerce,  as  the  word  is 
used  in  the  constitution,  is  a  unit,"  and  "  cannot  stop  at  the  ex- 
ternal boundary  line  of  each  state,  but  may  be  introduced  into  the 
interior."  "The  genius  and  character  of  the  whole  government 
seem  to  be  that  its  action  is  to  be  applied  to  all  the  external  con- 
cerns of  the  nation,  and  to  those  internal  concerns  which  affect 
the  states  generally." 

These  principles  were  announced  in  Gibbons  v.  Ogden,  and 
have  often  been  approved.  It  is  the  settled  doctrine  of  this  court 
that  interstate  commerce  embraces  something  more   than  the 


EARLY   SUPREME   COURT   DECISIONS:    1890-1901      517 

mere  physical  transportation  of  articles  of  prope^sty,  and  the 
vehicles  or  vessels  by  which  such  transportation  is  effected. 
Interstate  commerce  does  not,  therefore,  consist  in  transportation 
simply.  It  includes  the  purchase  and  sale  of  articles  that  are 
intended  to  be  transported  from  one  state  to  another,  —  every 
species  of  commercial  intercourse  among  the  states  and  with 
foreign  nations. 

The  fundamental  inquiry  in  this  case  is,  what  in  a  legal  sense 
is  an  unlawful  restraint  of  trade  ? 

Sir  VVilUam  Erie,  formerly  chief  justice  of  the  common  pleas, 
in  his  essay  on  the  Law  Relating  to  Trade  Unions,  well  said 
that  "restraint  of  trade,  according  to  a  general  principle  of  the 
common  law,  is  unlawful"  ;  that  "  at  common  law  every  person 
has  individually,  and  the  public  also  have  collectively,  a  right  to 
require  that  the  course  of  trade  should  be  kept  free  from  unrea- 
sonable obstruction  "  ;  and  that  "  the  right  to  a  free  course  for 
trade  is  of  great  importance  to  commerce  and  productive  industry, 
and  has  been  carefully  maintained  by  those  who  have  adminis- 
tered the  common  law." 

There  is  a  partial  restraint  of  trade  which,  in  certain  circum- 
stances, is  tolerated  by  the  law.  The  rule  upon  that  subject  is 
stated  in  Navigation  Co.  v.  Winsor,  -20  Wall.  64,  66,  where  it  was 
said  that : 

An  agreement  in  general  restraint  of  trade  is  illegal  and  void ;  but 
an  agreement  which  operates  merely  in  partial  restraint  of  trade  is 
good,  provided  it  be  not  unreasonable,  and  there  be  a  consideration  to 
support  it.  In  order  that  it  may  not  be  unreasonable,  the  restraiiit 
imposed  must  not  be  larger  than  is  required  for  the  necessary  protec- 
tion of  the  party  with  whom  the  contract  is  made.  A  contract,  even 
on  good  consideration,  not  to  use  a  trade  anywhere  in  England  is  held 
void  in  that  country  as  being  too  general  a  restraint  of  trade. 

Horner  v.  Graves,  7  Bing.  743. 

But  a  general  restraint  of  trade  has  often  resulted  from  com- 
binations formed  for  the  purpose  of  controlling  prices  by  destroy- 
ing the  opportunity  of  buyers  and  sellers  to  deal  with  each  other 
upon  the  basis  of  fair,  open,  free  competition.  Combinations  of 
this    character    have    frequently   been    the   subject   of    judicial 


5i8  TRUSTS,    POOLS   AND   CORPORATIONS 

scrutiny,  and  have  always  been  condemned  as  illegal  because  of 
their  necessary  tendency  to  restrain  trade.  Such  combinations 
are  against  common  right,  and  are  crimes  against  the  public. 
To  some  of  the  cases  of  that  character  it  will  be  well  to  refer. 

In  Morris  Run  Coal  Co.  v.  Barclay  Coal  Co.,  68  Pa.  St.  173,  183- 
187,  the  principal  question  was  as  to  the  validity  of  a  contract  made 
between  five  coal  corporations  of  Pennsylvania,  by  which  they  di- 
vided between  themselves  two  coal  regions  of  which  they  had  the 
control.  The  referee  in  the  case  found  that  those  companies 
acquired  under  their  arrangement  the  power  to  control  the  entire 
market  for  bituminous  coal  in  the  northern  part  of  the  state,  and 
their  combination  was,  therefore,  a  restraint  upon  trade,  and  against 
public  poHcy.  In  response  to  the  suggestion  that  the  real  pur- 
pose of  the  combination  was  to  lessen  expenses,  to  advance  the 
quality  of  coal,  and  to  deliver  it  in  the  markets  intended  to  be 
supplied  in  the  best  order  to  the  consumer,  the  supreme  court  of 
Pennsylvania  said  : 

This  is  denied  by  the  defendants,  but  it  seems  to  us  it  is  immaterial 
whether  these  positions  are  sustained  or  not.  Admitting  their  correct- 
ness, it  does  not  follow  that  these  advantages  redeem  the  contract  from 
the  obnoxious  effects  so  strikingly  presented  by  the  referee.  The  im- 
portant fact  is  that  these  companies  control  this  immense  coal  field  ; 
that  it  is  the  great  source  of  supply  of  bituminous  coal  to  the  state  of 
New  York  and  large  territories  westward  ;  that  by  this  contract  they 
control  the  price  of  coal  in  this  extensive  market,  and  make  it  bring 
sums  it  would  not  command  if  left  to  the  natural  laws  of  trade ;  that  it 
concerns  an  article  of  prime  necessity  for  many  uses ;  that  its  operation 
is  general  in  this  large  region,  and  affects  all  who  use  coal  as  a  fuel, 
and  this  is  accomplished  by  a  combination  of  all  the  companies 
engaged  in  this  branch  of  business  in  the  large  region  where  they 
operate.  The  combination  is  wide  in  scope,  general  in  its  influence, 
and  injurious  in  effects.  These  being  its  features,  the  contract  is 
against  public  policy,  illegal,  and  therefore  void. 

Again,  in  the  same  case : 

The  effects  produced  on  the  public  interests  lead  to  the  considera- 
tion of  another  feature  of  great  weight  in  determining  the  illegality  of 
the  contract,  to  wit,  the  combination  resorted  to  by  these  five  com- 
panies.    Singly  each  might  have  suspended  deliveries  and  sales  of 


EARLY   SUPREME   COURT   DECISIONS:    1890-1901      519 

coal  to  suit  its  own  interests,  and  might  have  raised  tjifxprice,  even 
though  this  might  have  been  detrimental  to  the  public  interest.  There^ 
is  a  certain  freedom  which  must  be  allowed  to  everyone  in  the  manage- 
ment of  his  own  affairs.  When  competition  is  left  free,  individual 
error  or  folly  will  generally  find  a  corrective  in  the  conduct  of  others. 
But  here  is  a  combination  of  all  the  companies  operating  in  the  Kloss- 
burg  and  Barclay  regions,  and  controlling  their  entire  productions. 
They  have  combined  together  to  govern  the  supply  and  the  price  of 
coal  in  all  the  markets  from  the  Hudson  to  the  Misiiissippi  rivers,  and 
from  Pennsylvania  to  the  Lakes.  This  combination  has  a  power  in 
its  confederated  form  which  no  individual  action  can  confer.  The 
public  interest  must  succumb  to  it,  for  it  has  left  no  competition  free  to 
correct  its  baleful  influence.  When  the  supply  of  coal  is  suspended, 
the  demand  for  it  becomes  importunate,  and  prices  must  rise  ;  or,  if 
the  supply  goes  forward,  the  price  fixed  by  the  confederates  must 
accompany  it.  The  domestic  hearth,  the  furnaces  of  the  iron  master, 
and  the  fires  of  the  manufacturer  all  feel  the  restraint,  while  many 
dependent  hands  are  paralyzed,  and  hungry  mouths  are  stinted.  The 
influence  of  a  lack  of  supply  or  a  rise  in  the  price  of  an  article  of 
such  prime  necessity  cannot  be  measured.  It  permeates  the  entire 
mass  of  the  community,  and  leaves  few  of  its  members  untouched  by 
its  withering  blight.  Such  a  combination  is  more  than  a  contract ;  it 
is  an  offense.  "  I  take  it,"  said  Gibson,  J.,  "a  combination  is  criminal 
whenever  the  act  to  be  done  has  a  necessary  tendency  to  prejudice  the 
public  or  to  oppress  individuals,  by  unjustly  subjecting  them  to  the 
power  of  the  confederates,  and  giving  effect  to  the  purpose  of  the  latter, 
whether  of  extortion  or  of  mischief."  Cotn.  v.  Carlisle,  Brightly,  N.  P. 
40.  In  all  such  combinations  where  the  purpose  is  injurious  or  un- 
lawful, the  gist  of  the  offence  is  the  conspiracy.  Men  can  often  do  by 
the  combination  of  many  what  severally  no  one  could  accomplish,  and 
even  what,  when  done  by  one,  would  be  innocent.  There  is  a 
potency  in  numbers  when  combined  which  the  law  cannot  overlook, 
where  injury  is  the  consequence. 

These  principles  were  applied  in  People  v.  CJiieago  Gas  Tnist 
Co.,  130  111.  269,  292,  297,  22  N.  E.  798,  which  involved  the 
validity  of  a  corporation  formed  for  the  purpose  of  operating 
gas  works,  and  of  manufacturing  and  selling  gas,  and  which,  for 
the  purpose  of  destroying  competition,  acquired  the  stock  of 
four  other  gas  companies,  and  thereby  obtained  a  monopoly  in 
the  business  of  furnishing  illuminating  gas  to  the  city  of  Chicago 


520  TRUSTS,   POOLS  AND   CORPORATIONS 

and  its  inhabitants.     The  court,  in  declaring  the  organization  of 
the  company  to  be  illegal,  said : 

The  fact  that  the  appellee,  almost  immediately  after  its  organization, 
bought  up  a  majority  of  the  shares  of  stock  of  each  of  these  companies, 
shows  that  it  was  not  making  a  mere  investment  of  surplus  funds,  but 
that  it  designed  and  intended  to  bring  the  four  companies  under  its 
control,  and  by  crushing  out  competition,  to  monopolize  the  gas  busi- 
ness in  Chicago.  .Of  what  avail,  [said  the  court,]  is  it  that  any  number 
of  gas  companies  may  be  formed  under  the  general  incorporation  law, 
if  a  giant  trust  company  can  be  clothed  with  the  power  of  buying  up 
and  holding  the  stock  and  property  of  such  companies,  and,  through 
the  control  thereby  attained,  can  direct  all  their  operations,  and  weld 
them  into  one  huge  combination  ? 

A  leading  case  on  the  question  as  to  what  combinations  are 
illegal  as  being  in  general  restraint  of  trade  is  Ric/iardson  v. 
Bithl,  yj  Mich.  632,  635,  657,  660,  43  N.  W.  1102,  which  related 
to  certain  agreements  connected  with  the  business  and  operations 
of  the  Diamond  Match  Company.  From  the  report  of  the  case 
it  appears  that  that  company  was  organized,  under  the  laws  of 
Connecticut,  for  the  purpose  of  uniting  in  one  corporation  all  the 
match  manufactories  in  the  United  States,  and  to  monopolize  and 
control  the  business  of  making  all  the  friction  matches  in  the 
country,  and  establish  the  price  thereof,  ^o  that  end  it  became 
necessary,  among  other  things,  to  buy  many  plants  that  had 
become  established  or  were  about  to  be  established,  as  well 
as  the  property  used  in  connection  therewith.  Chief  Justice 
Sherwood  of  the  supreme  court  of  Michigan  said : 

The  sole  object  of  the  corporation  is  to  make  money  by  having  it 
in  its  power  to  raise  the  price  of  the  article,  or  diminish  the  quantity 
to  be  made  and  used,  at  its  pleasure.  Thus  both  the  supply  of  the 
article  and  the  price  thereof  are  made  to  depend  upon  the  action  of  a 
half  dozen  individuals,  more  or  less,  to  satisfy  their  cupidity  and 
avarice,  who  may  happen  to  have  the  controlling  interest  in  this  cor- 
poration, —  an  artificial  person,  governed  by  a  single  motive  or  purpose, 
which  is  to  accumulate  money  regardless  of  the  wants  or  necessities 
of  over  60,000,000  people.  The  article  thus  completely  under  their 
control  for  the  last  fifty  years  has  come  to  be  regarded  as  one  of 
necessity,  not  only  in  every  household  in  the  land,  but  one  of  daily  use 


EARLY   SUPREME   COURT   DECISIONS:    1890-1901      521 

by  almost  every  individual  in  the  country.  It  is  difficuk-to  conceive 
of  a  monopoly  which  can  affect  a  greater  number  of  people,  or  one 
more  extensive  in  its  effect  on  the  country,  than  that  of  the  Diamond 
Match  Company.  It  was  to  aid  that  company  in  its  purposes  and  in 
carrying  out  its  object  that  the  contract  in  this  case  was  made  between 
those  parties,  and  which  we  are  now  asked  to  aid  in  enforcing.  Mo- 
nopoly in  trade,  or  in  any  kind  of  business  in  this  country,  is  odious  to 
our  form  of  government.  It  is  sometimes  permitted  to  aid  the  govern- 
ment in  carrying  on  a  great  public  enterprise  or  public  work  under 
governmental  control  in  the  interest  of  the  public.  Its  tendency  is, 
however,  destructive  of  free  institutions,  and  repugnant  to  the  instincts 
of  a  free  people,  and  contrary  to  the  whole  scope  and  spirit  of  the 
federal  constitution,  and  is  not  allowed  to  exist  under  express  pro- 
visions in  several  of  our  state  constitutions.  .  .  .  All  combinations 
among  persons  or  corporations  for  the  purpose  of  raising  or  control- 
ling the  prices  of  merchandise,  or  any  of  the  necessaries  of  life,  are 
monopolies,  and  intolerable  ;  and  ought  to  receive  the  condemnation 
of  all  courts. 

This  extended  reference  to  adjudged  cases  relating  to  unlaw- 
ful restraints  upon  the  interior  traffic  of  a  state  has  been  made 
for  the   purpose  of    showing  that  a  combination  such  as  that 
organized   under  the  name  of    the  American   Sugar   Refining 
Company  has  been  uniformly  held  by  the  courts  of  the  states 
to  be  against  public  policy,  and  illegal,  because  of  its  necessary 
tendency  to  impose  improper  restraints  upon  trade.     And  such, 
I  take  it,  would  be  the  judgment  of   any  circuit  court  of  the 
United   States  in  a  case   between   parties  in  which   it   became 
necessary  to  determine  the  question.    The  judgments  of  the  state 
courts  rest  upon  general  principles  of  law,  and  not  necessarily 
upon   statutory  provisions  expressly  condemning  restraints  of 
trade  imposed  by  or  resulting  from  combinations.     Of  course, 
in  view  of  the  authoritcs,  it  will  not  be  doubted  that  it  would  be 
competent  for  a  state,  under  the  power  to  regulate  its  domestic 
commerce,  and  for  the  purpose  of  protecting  its  people  against 
fraud  and  injustice,  to  make  it  a  public  offense,  punishable  by 
fine  and  imprisonment,  for  individuals  or  corporations  to  make 
contracts,  form  combinations,  or  engage  in  conspiracies,  which 
unduly  restrain  trade  or  commerce  carried  on  within  its  limits, 
and  also  to  authorize  the  institution  of  proceedings  for  the  pur- 


522  TRUSTS,    POOLS   AND    CORPORATIONS 

pose  of  annulling  contracts  of  that  character,  as  well  as  of  pre- 
venting or  restraining  such  combinations  and  conspiracies. 

But  there  is  a  trade  among  the  several  states  which  is  distinct 
from  that  carried  on  within  the  territorial  limits  of  a  state.  The 
regulation  and  control  of  the  former  are  committed  by  the  na- 
tional constitution  to  congress.  Commerce  among  the  states,  as 
this  court  has  declared,  is  a  unit,  and  in  respect  of  that  commerce 
this  is  one  country,  and  we  are  one  people.  It  may  be  regu- 
lated by  rules  applicable  to  every  part  of  the  United  States,  and 
state  lines  and  state  jurisdiction  cannot  interfere  with  the  en- 
forcement of  such  rules.  The  jurisdiction  of  the  general  gov- 
ernment extends  over  every  foot  of  territory  within  the  United 
States,  Under  the  power  with  which  it  is  invested,  congress 
may  remove  unlawful  obstructions,  of  whatever  kind,  to  the  free 
course  of  trade  among  the  states.  In  so  doing  it  would  not 
interfere  with  the  "  autonomy  of  the  states,"  because  the  power 
thus  to  protect  interstate  commerce  is  expressly  given  by  the 
people  of  all  the  states.  Interstate  intercourse,  trade,  and  traffic 
are  absolutely  free,  except  as  such  intercourse,  trade,  or  traffic 
may  be  incidentally  or  indirectly  affected  by  the  exercise  by  the 
states  of  their  reserved  police  powers.  Sherlock  v.  Ailing,  99 
U.  S.  99,  103.  It  is  the  constitution,  the  supreme  law  of  the 
land,  which  invests  congress  with  power  to  protect  commerce 
among  the  states  against  burdens  and  exactions  arising  from 
unlawful  restraints  by  whatever  authority  imposed.  Surely,  a 
right  secured  or  granted  by  that  instrument  is  under  the  protec- 
tion of  the  government  which  that  instrument  creates.  Any 
combination,  therefore,  that  disturbs  or  unreasonably  obstructs 
freedom  in  buying  and  selling  articles  manufactured  to  be  sold 
to  persons  in  other  states,  or  to  be  carried  to  other  states,  —  a 
freedom  that  cannot  exist  if  the  right  to  buy  and  sell  is  fettered 
by  unlawful  restraints  that  crush  out  competition,  —  affects,  not 
incidentally,  but  directly,  the  people  of  all  the  states ;  and  the 
remedy  for  such  an  evil  is  found  only  in  the  exercise  of  powers 
confided  to  a  government  which,  this  court  has  said,  was  the  gov- 
ernment of  all,  exercising  powers  delegated  by  all,  representing 
all,  acting  for  all.     HfCullock  v.  Maryland,  4  Wheat.  405. 

It  may  be  admitted  that  an  act  which  did  nothing  more  than 


EARLY   SUPREME   COURT   DECISIONS:    1890- 1901      523 

forbid,  and  which  had  no  other  object  than  to  forbid,  the  mere 
refining  of  sugar  in  any  state,  would  be  in  excess  of  any  power 
granted  to  congress.  But  the  act  of  1890  is  not  of  that  charac- 
ter. It  does  not  strike  at  the  manufacture  simply  of  articles 
that  are  legitimate  or  recognized  subjects  of  commerce,  but  at 
combinations  that  unduly  restrain,  because  they  monopolize,  the 
buying  and  selling  of  articles  which  are  to  go  into  interstate 
commerce.  In  State  v.  Stewart,  59  Vt.  273,  286,  9  Atl.  559,  it 
was  said  that  if  a  combination  of  persons  "  seek  to  restrain  trade, 
or  tend  to  the  destruction  of  the  material  property  of  the  coun- 
try, they  work  injury  to  the  whole  people."  And  in  State  v. 
Glidden,  55  Conn.  46,  75,  8  Atl.  890,  the  court  said  : 

Any  one  man,  or  any  one  of  several  men  acting  independently,  is 
powerless  ;  but  when  several  combine,  and  direct  their  united  energies 
to  the  accomplishment  of  a  bad  purpose,  the  combination  is  formi- 
dable. Its  power  for  evil  increases  as  its  number  increases.  .  .  . 
The  combination  becomes  dangerous  and  subversive  of  the  rights  of 
others,  and  the  law  wisely  says  it  is  a  crime. 

Chief  Justice  Gibson  well  said  in  Com.  v.  Carlisle,  Brightly 
N.  P.  36,  39,  40 : 

There  is  between  the  different  parts  of  the  body  politic  a  reciprocity 
of  action  on  each  other,  which,  like  the  action  of  antagonizing  muscles 
in  the  natural  body,  not  only  prescribes  to  each  its  appropriate  state 
and  action,  but  regulates  the  motion  of  the  whole.  The  effort  of  an 
individual  to  disturb  this  equilibrium  can  never  be  perceptible,  nor 
carry  the  operation  of  his  interest,  or  that  of  any  other  individual, 
beyond  the  limits  of  fair  competition  ;  but  the  increase  of  power  by 
combination  of  means  being  in  geometrical  proportion  to  the  number 
concerned,  an  association  may  be  able  to  give  an  impulse,  not  only 
oppressive  to  individuals,  but  mischievous  to  the  public  at  large ;  and 
it  is  the  employment  of  an  engine  so  powerful  and  dangerous  that  gives 
criminality  to  an  act  that  would  be  perfectly  innocent,  at  least  in  a 
legal  view,  when  done  by  an  individual. 

These  principles  underlie  the  act  of  congress,  which  has  for 
its  sole  object  the  protection  of  such  trade  and  commerce  as 
the  constitution  confides  to  national  control,  and  the  question  is 
presented  whether  the  combination  assailed  by  this  suit  is  an 


524  TRUSTS,   POOLS  AND   CORPORATIONS 

unlawful  restraint  upon  interstate  trade  in  a  necessary  article  of 
food,  which,  as  every  one  knows,  has  always  entered,  now  enters, 
and  must  continue  to  enter,  in  vast  quantities,  into  commerce 
among  the  states. 

In  Kidd  v.  Pearson  we  recognized,  as  had  been  done  in  pre- 
vious cases,  the  distinction  between  the  mere  transportation  of 
articles  of  interstate  commerce  and  the  purchasing  and  selling 
that  precede  transportation  It  is  said  that  manufacture  precedes 
commerce,  and  is  not  a  part  of  it.  But  it  is  equally  true  that 
when  manufacture  ends,  that  which  has  been  manufactured  be- 
comes a  subject  of  commerce ;  that  buying  and  selling  succeed 
manufacture,  come  into  existence  after  the  process  of  manufac- 
ture is  completed,  precede  transportation,  and  are  as  much  com- 
mercial intercourse,  where  articles  are  bought  to  be  carried  from 
one  state  to  another,  as  is  the  manual  transportation  of  such 
articles  after  they  have  been  so  purchased.  The  distinction  was 
recognized  by  this  court  in  Gibbons  v.  Ogden,  where  the  princi- 
pal question  was  whether  commerce  included  navigation.  Both 
the  court  and  counsel  recognized  buying  and  selling  or  barter  as 
included  in  commerce.  Chief  Justice  Marshall  said  that  the 
mind  can  scarcely  conceive  a  system  for  regulating  commerce, 
which  was  "  confined  to  prescribing  rules  for  the  conduct  of 
individuals  in  the  actual  employment  of  buying  and  selling,  or 
of  barter."     Pages  189,  190,  9  Wheat. 

The  power  of  congress  covers  and  protects  the  absolute  free- 
dom of  such  intercourse  and  trade  among  the  states  as  may  or 
must  succeed  manufacture  and  precede  transportation  from  the 
place  of  purchase.  This  would  seem  to  be  conceded,  for  the 
court  in  the  present  case  expressly  declare  that  "contracts  to 
buy,  sell,  or  exchange  goods  to  be  transported  among  the  sev- 
eral states,  the  transportation  and  its  instrumentalities,  and  ar- 
ticles bought,  sold,  or  exchanged  for  the  purpose  of  such  transit 
among  the  states,  or  put  in  the  way  of  transit,  may  be  regulated, 
but  this  is  because  they  form  part  of  interstate  trade  or  com- 
merce." Here  is  a  direct  admission  —  one  which  the  settled 
doctrines  of  this  court  justify  —  that  contracts  to  buy,  and  the 
purchasing  of  goods  to  be  transported  from  one  state  to  another, 
and  transportation,  with  its  instrumentahties,  are   all  parts  of 


EARLY   SUPREME   COURT   DECISIONS:    1890-1901       525 

interstate  trade  or  commerce.  Each  part  of  such  irnde  is  then 
under  the  protection  of  congress.  And  yet,  by  the  opinion  and 
judgment  in  this  case,  if  I  do  not  misapprehend  them,  congress 
is  without  power  to  protect  the  commercial  intercourse  that  such 
purchasing  necessarily  involves  against  the  restraints  and  bur- 
dens arising  from  the  existence  of  combinations  that  meet  pur- 
chasers, from  whatever  state  they  come,  with  the  threat  —  for  it 
is  nothing  more  nor  less  than  a  threat  —  that  they  shall  not  pur- 
chase what  they  desire  to  purchase,  except  at  the  prices  fixed 
by  such  combinations.  A  citizen  of  Missouri  has  the  right  to 
go  in  person,  or  send  orders,  to  Pennsylvania  and  New  Jersey 
for  the  purpose  of  purchasing  refined  sugar.  But  of  what  value 
is  that  right  if  he  is  confronted  in  those  states  by  a  vast  com- 
bination, which  absolutely  controls  the  price  of  that  article  by 
reason  of  its  having  acquired  all  the  sugar  refineries  in  the 
United  States  in  order  that  they  may  fix  prices  in  their  own 
interest  exclusively .'' 

In  my  judgment,  the  citizens  of  the  several  states  composing 
the  Union  are  entitled  of  right  to  buy  goods  in  the  state  where 
they  are  manufactured,  or  in  any  other  state,  without  being  con- 
fronted by  an  illegal  combination  whose  business  extends 
throughout  the  whole  country,  which,  by  the  law  everywhere,  is 
an  enemy  to  the  public  interests,  and  which  prevents  such  buy- 
ing, except  at  prices  arbitrarily  fixed  by  it.  I  insist  that  the 
free  course  of  trade  among  the  states  cannot  coexist  with  such 
combinations.  When  I  speak  of  trade  I  mean  the  buying  and 
selling  of  articles  of  every  kind  that  are  recognized  articles  of 
interstate  commerce.  Whatever  improperly  obstructs  the  free 
course  of  interstate  intercourse  and  trade,  as  involved  in  the 
buying  and  selling  of  articles  to  be  carried  from  one  state  to 
another,  may  be  reached  by  congress  under  its  authority  to 
regulate  commerce  among  the  states.  The  exercise  of  that 
authority  so  as  to  make  trade  among  the  states  in  all  recognized 
articles  of  commerce  absolutely  free  from  unreasonable  or  illegal 
restrictions  imposed  by  combinations  is  justified  by  an  express 
grant  of  power  to  congress,  and  would  redound  to  the  welfare 
of  the  whole  country.  I  am  unable  to  perceive  that  any  such 
result  would  imperil  the  autonomy  of  the  states,  especially  as 


526  TRUSTS,   POOLS  AND   CORPORATIONS 

that  result  cannot  be  attained  through  the  action  of  any  one 
state. 

Undue  restrictions  or  burdens  upon  the  purchasing  of  goods 
in  the  market  for  sale,  to  be  transported  to  other  states,  cannot 
be  imposed,  even  by  a  state,  without  violating  the  freedom  of 
commercial  intercourse  guaranteed  by  the  constitution.  But  if 
a  state  within  whose  limits  the  business  of  refining  sugar  is 
exclusively  carried  on  may  not  constitutionally  impose  burdens 
upon  purchases  of  sugar  to  be  transported  to  other  states,  how 
comes  it  that  combinations  of  corporations  or  individuals  within 
the  same  state  may  not  be  prevented  by  the  national  govern- 
ment from  putting  unlawful  restraints  upon  the  purchasing  of 
that  article  to  be  carried  from  the  state  in  which  such  pur- 
chases are  made  ?  If  the  national  power  is  competent  to  repress 
state  action  in  restraint  of  interstate  trade  as  it  may  be  involved 
in  purchases  of  refined  sugar  to  be  transported  from  one  state 
to  another  state,  surely  it  ought  to  be  deemed  sufficient  to 
prevent  unlawful  restraints  attempted  to  be  imposed  by  com- 
binations of  corporations  or  individuals  upon  those  identical 
purchases;  otherwise  illegal  combinations  of  corporations  or 
individuals  may  —  so  far  as  national  power  and  interstate  com- 
merce are  concerned  —  do  with  impunity  what  no  state  can  do. 

Suppose  that  a  suit  were  brought  in  one  of  the  courts  of  the 
United  States  —  jurisdiction  being  based,  it  may  be,  alone  upon 
the  diverse  citizenship  of  the  parties  —  to  enforce  the  stipula- 
tions of  a  written  agreement,  which  had  for  its  object  to  acquire 
the  possession  of  all  the  sugar  refineries  in  the  United  States, 
in  order  that  those  engaged  in  the  combination  might  obtain  the 
entire  control  of  the  business  of  refining  and  selling  sugar 
throughout  the  country,  and  thereby  to  increase  or  diminish 
prices  as  the  particular  interests  of  the  combination  might 
require.  I  take  it  that  the  court,  upon  recognized  principles  of 
law  common  to  the  jurisprudence  of  this  country  and  of  Great 
Britain,  would  deny  the  rehef  asked,  and  dismiss  the  suit 
upon  the  ground  that  the  necessary  tendency  of  such  an  agree- 
ment and  combination  was  to  restrain  not  simply  trade  that 
was  completely  internal  to  the  state  in  which  the  parties  resided, 
but  trade  and  commerce  among  all  the  states,  and  was,  there- 


EARLY   SUPREME   COURT    DECISIONS:    1890-1901      527 

fore,  against  public  policy,  and  illegal.  If  I  am  ngjjt  in  this 
view,  it  would  seem  to  follow,  necessarily,  that  congress  could 
enact  a  statute  forbidding  such  combinations  so  far  as  they 
affected  interstate  commerce,  and  provide  for  their  suppression 
as  well  through  civil  proceedings  instituted  for  that  purpose  as 
by  penalties  against  those  engaged  in  them. 

In  committing  to  congress  the  control  of  commerce  with 
foreign  nations  and  among  the  several  states,  the  constitution 
did  not  define  the  means  that  may  be  employed  to  protect  the 
freedom  of  commercial  intercourse  and  traffic  established  for 
the  benefit  of  all  the  people  of  the  Union.  It  wisely  forbore 
to  impose  any  limitations  upon  the  exercise  of  that  power  except 
those  arising  from  the  general  nature  of  the  government,  or 
such  as  are  embodied  in  the  fundamental  guaranties  of  liberty 
and  property.  It  gives  to  congress,  in  express  words,  authority 
to  enact  all  laws  necessary  and  proper  for  carrying  into  execu- 
tion the  power  to  regulate  commerce ;  and  whether  an  act  of 
congress,  passed  to  accomplish  an  object  to  which  the  general 
government  is  competent,  is  within  the  power  granted,  must  be 
determined  by  the  rule  announced  through  Chief  Justice  Mar- 
shall three  quarters  of  a  century  ago,  and  which  has  been 
repeatedly  affirmed  by  this  court.     That  rule  is : 

The  sound  construction  of  the  constitution  must  allow  to  the  national 
legislature  the  discretion  with  respect  to  the  means  by  which  the 
powers  it  confers  are  to  be  carried  into  execution,  which  will  enable 
that  body  to  perform  the  high  duties  assigned  to  it  in  the  manner 
most  beneficial  to  the  people.  Let  the  end  be  legitimate,  let  it  be 
within  the  scope  of  the  constitution  ;  and  all  means  which  are  appro- 
priate, which  are  plainly  adapted  to  that  end,  which  are  not  pro- 
hibited, but  consistent  with  the  letter  and  spirit  of  the  constitution,  are 
constitutional. 

M'Cnlloch  V.  Maryland,  4  Wheat.   316,  421. 

The  end  proposed  to  be  accomplished  by  the  act  of  1890  is  the 
protection  of  trade  and  commerce  among  the  states  against  unlaw- 
ful restraints.  Who  can  say  that  that  end  is  not  legitimate,  or 
is  not  within  the  scope  of  the  constitution  }  The  means  employed 
are  the  suppression,  by  legal  proceedings,  of  combinations,  con- 


528  TRUSTS,    POOLS   AND   CORPORATIONS 

spiracies,  and  monopolies  which,  by  their  inevitable  and  admitted 
tendency,  improperly  restrain  trade  and  commerce  among  the 
states.  Who  can  say  that  such  means  are  not  appropriate  to 
attain  the  end  of  freeing  commercial  intercourse  among  the 
states  from  burdens  and  exactions  imposed  upon  it  by  com- 
binations which,  under  principles  long  recognized  in  this  coun- 
try, as  well  as  at  the  common  law,  are  illegal  and  dangerous  to 
the  public  welfare?  What  clause  of  the  constitution  can  be 
referred  to  which  prohibits  the  means  thus  prescribed  in  the  act 
of  congress  ? 

It  may  be  that  the  means  employed  by  congress  to  suppress 
combinations  that  restrain  interstate  trade  and  commerce  are 
not  all  or  the  best  that  could  have  been  devised.  But  congress, 
under  the  delegation  of  authority  to  enact  laws  necessary  and 
proper  to  carry  into  effect  a  power  granted,  is  not  restricted  to 
the  employment  of  those  means  "  without  which  the  end  would 
be  entirely  unattainable." 

To  have  prescribed  the  means,  [this  court  has  said,]  by  which  gov- 
ernment should,  in  all  future  time,  execute  its  powers,  would  have 
been  to  change  entirely  the  character  of  that  instrument,  and  give  it 
the  properties  of  a  legal  code.  It  would  have  been  an  unwise  attempt 
to  provide  by  immutable  rules  for  exigencies  which,  if  foreseen  at  all, 
must  have  been  seen  dimly,  and  which  can  be  best  provided  for  as 
they  occur.  To  have  declared  that  the  best  means  shall  not  be  used, 
but  those  alone  without  which  the  power  given  would  be  nugatory, 
would  have  been  to  deprive  the  legislature  of  the  capacity  to  avail 
itself  of  experience,  to  exercise  its  reason,  and  to  accommodate  its 
legislation  to  circumstances. 

Again : 

Where  the  law  is  not  prohibited,  and  is  really  calculated  to  effect 
any  of  the  objects  intrusted  to  the  government,  to  undertake  here  to 
inquire  into  the  degree  of  its  necessity  would  be  to  pass  the  line 
which  circumscribes  the  judicial  department,  and  to  tread  on  legisla- 
tive ground. 

APCuUocJi  V.Maryland,  4  Wheat.  316,  415,  423. 

By  the  act  of  1890,  congress  subjected  to  forfeiture  "any 
property  owned  under  any  contract  or  by  any  combination,  or 
pursuant    to  any  conspiracy  (and    being    the    subject    thereof) 


EARLY   SUPREME   COURT   DECISIONS:    1890-1901     529 

mentioned  in  section  one  of  this  act,  and  being  in  tlie-course  of 
transportation  from  one  state  to  another,  or  to  a  foreign  country." 
It  was  not  deemed  wise  to  subject  such  property  to  forfeiture 
before  transportation  began  or  after  it  ended.  If  it  be  suggested 
that  congress  might  have  prohibited  the  transportation  from  the 
state  in  which  they  are  manufactured  any  articles,  by  whomso- 
ever at  the  time  owned,  that  had  been  manufactured  by  combi- 
nations formed  to  monopolize  some  designated  part  of  trade  or 
commerce  among  the  states,  my  answer  is  that  it  is  not  within 
the  functions  of  the  judiciary  to  adjudge  that  congress  shall 
employ  particular  means  in  execution  of  a  given  power,  simply 
because  such  means  are,  in  the  judgment  of  the  courts,  best 
conducive  to  the  end  sought  to  be  accomplished.  Congress,  in 
the  exercise  of  its  discretion  as  to  choice  of  means  conducive  to 
an  end  to  which  it  was  competent,  determined  to  reach  that  end 
through  civil  proceedings,  instituted  to  prevent  or  restrain  these 
obnoxious  combinations  in  their  attempts  to  burden  interstate 
commerce  by  obstructions  that  interfere  in  advance  of  transporta- 
tion with  the  course  of  trade  between  the  people  of  the  states. 
In  other  words  congress  sought  to  prevent  the  coming  into 
existence  of  combinations  the  purpose  or  tendency  of  which 
was  to  impose  unlawful  restraints  upon  interstate  commerce. 

The  question  here  relates  to  restraints  upon  the  freedom  of 
interstate  trade  and  commerce  imposed  by  illegal  combinations. 
After  the  fullest  consideration  I  have  been  able  to  bestow  upon 
this  important  question,  I  find  it  impossible  to  refuse  my  assent 
to  this  proposition  :  Whatever  a  state  may  do  to  protect  its  com- 
pletely interior  trafific  or  trade  against  unlawful  restraints,  the 
general  government  is  empowered  to  do  for  the  protection  of 
the  people  of  all  the  states  —  for  this  purpose,  one  people  — 
against  unlawful  restraints  imposed  upon  interstate  traffic  or 
trade  in  articles  that  are  to  enter  into  commerce  among  the 
several  states.  If,  as  already  shown,  a  state  may  prevent  or 
suppress  a  combination,  the  effect  of  which  is  to  subject  its 
domestic  trade  to  the  restraints  necessarily  arising  from  their 
obtaining  the  absolute  control  of  the  sale  of  a  particular  article 
in  general  use  by  the  community,  there  ought  to  be  no  hesita- 
tion in  allowing  to  congress  the  right  to  suppress  a  similar  com- 


530  TRUSTS,   POOLS  AND   CORPORATIONS 

bination  that  imposes  a  like  unlawful  restraint  upon  interstate 
trade  and  traffic  in  that  article.  While  the  states  retain,  be- 
cause they  have  never  surrendered,  full  control  of  their  com- 
pletely internal  traffic,  it  was  not  intended  by  the  framers  of  the 
constitution  that  any  part  of  interstate  commerce  should  be  ex- 
cluded from  the  control  of  congress.  Each  state  can  reach  and 
suppress  combinations  so  far  as  they  unlawfully  restrain  its 
interior  trade,  while  the  national  government  may  reach  and 
suppress  them  so  far  as  they  unlawfully  restrain  trade  among 
the  states. 

While  the  opinion  of  the  court  in  this  case  does  not  declare 
the  act  of  1890  to  be  unconstitutional,  it  defeats  the  main  object 
for  which  it  was  passed,  for  it  is,  in  effect,  held  that  the  statute 
would  be  unconstitutional  if  interpreted  as  embracing  such  un- 
lawful restraints  upon  the  purchasing  of  goods  in  one  state  to 
be  carried  to  another  state  as  necessarily  arise  from  the  exist- 
ence of  combinations  formed  for  the  purpose  and  with  the 
effect,  not  only  of  monopolizing  the  ownership  of  all  such  goods 
in  every  part  of  the  country,  but  of  controlling  the  prices  for 
them  in  all  the  states.  This  view  of  the  scope  of  the  act  leaves 
the  public,  so  far  as  national  power  is  concerned,  entirely  at  the 
mercy  of  combinations  which  arbitrarily  control  the  prices  of 
articles  purchased  to  be  transported  from  one  state  to  another 
state.  I  cannot  assent  to  that  view.  In  my  judgment,  the 
general  government  is  not  placed  by  the  constitution  in  such  a 
condition  of  helplessness  that  it  must  fold  its  arms  and  remain 
inactive  while  capital  combines,  under  the  name  of  a  corpora- 
tion, to  destroy  competition,  not  in  one  state  only,  but  throughout 
the  entire  country,  in  the  buying  and  selling  of  articles  —  espe- 
cially the  necessaries  of  life  —  that  go  into  commerce  among  the 
states.  The  doctrine  of  the  autonomy  of  the  states  cannot 
properly  be  invoked  to  justify  a  denial  of  power  in  the  national 
government  to  meet  such  an  emergency,  involving,  as  it  does, 
that  freedom  of  commercial  intercourse  among  the  states  which 
the  constitution  sought  to  attain. 

It  is  said  that  there  are  no  proofs  in  the  record  which  indi- 
cate an  intention  upon  the  part  of  the  American  Sugar  Refin- 
ing Company  and  its  associates  to  put  a  restraint  upon  trade  or 


EARLY   SUPREME   COURT   DECISIONS:    1890-1901      531 

commerce.  Was  it  necessary  that  formal  proof  be-nnade  that 
the  persons  engaged  in  this  combination  admitted  in  words  that 
they  intended  to  restrain  trade  or  commerce  ?  Did  any  one 
expect  to  find  in  the  written  agreements  which  resulted  in  the 
formation  of  this  combination  a  distinct  expression  of  a  purpose 
to  restrain  interstate  trade  or  commerce?  Men  who  form  and 
control  these  combinations  are  too  cautious  and  wary  to  make 
such  admissions  orally  or  in  writing.  Why,  it  is  conceded  that 
the  object  of  this  combination  was  to  obtain  control  of  the  busi- 
ness of  making  and  selling  refined  sugar  throughout  the  entire 
country.  Those  interested  in  its  operations  will  be  satisfied 
with  nothing  less  than  to  have  the  whole  population  of  America 
pay  tribute  to  them.  That  object  is  disclosed  upon  the  very 
face  of  the  transactions  described  in  the  bill.  And  it  is  proved 
—  indeed,  is  conceded —  that  that  object  has  been  accomplished 
to  the  extent  that  the  American  Sugar  Refining  Company  now 
controls  98  per  cent  of  all  the  sugar  refining  business  in  the 
country,  and  therefore  controls  the  price  of  that  article  every- 
where. Now,  the  mere  existence  of  a  combination  having 
such  an  object  and  possessing  such  extraordinary  power  is  itself, 
under  settled  principles  of  law,  — there  being  no  adjudged  case 
to  the  contrary  in  this  country,  —  a  direct  restraint  of  trade  in 
the  article  for  the  control  of  the  sales  of  which  in  this  country 
that  combination  was  organized.  And  that  restraint  is  felt  in 
all  the  states,  for  the  reason,  known  to  all,  that  the  article  in 
question  goes,  was  intended  to  go,  and  must  always  go,  into 
commerce  among  the  several  states,  and  into  the  homes  of  peo- 
ple in  every  condition  of  life. 

A  decree  recognizing  the  freedom  of  commercial  intercourse 
as  embracing  the  right  to  buy  goods  to  be  transported  from  one 
state  to  another  without  buyers  being  burdened  by  unlawful 
restraints  imposed  by  combinations  of  corporations  or  individ- 
uals, so  far  from  disturbing  or  endangering  would  tend  to  pre- 
serve the  autonomy  of  the  states,  and  protect  the  people  of  all 
states  against  dangers  so  portentous  as  to  excite  apprehension 
for  the  safety  of  our  liberties.  If  this  be  not  a  sound  interpre- 
tation of  the  constitution,  it  is  easy  to  perceive  that  interstate 
traffic,  so  far  as  it  involves  the  price  to  be  paid  for  articles  nee- 


532  TRUSTS,    POOLS   AND    CORPORATIONS 

essary  to  the  comfort  and  well-being  of  the  people  in  all  the 
states,  may  pass  under  the  absolute  control  of  overshadowing 
combinations  having  financial  resources  without  limit,  and  an 
audacity  in  the  accomplishment  of  their  objects  that  recognizes 
none  of  the  restraints  of  moral  obligations  controlling  the  action 
of  individuals ;  combinations  governed  entirely  by  the  law  of 
greed  and  selfishness,  so  powerful  that  no  single  state  is  able  to 
overthrow  them,  and  give  the  required  protection  to  the  whole 
country,  and  so  all-pervading  that  they  threaten  the  integrity  of 
our  institutions. 

We  have  before  us  the  case  of  a  combination  which  absolutely 
controls,  or  may,  at  its  discretion,  control,  the  price  of  all  re- 
fined sugar  in  this  country.  Suppose  another  combination, 
organized  for  private  gain  and  to  control  prices,  should  obtain 
possession  of  all  the  large  flour  mills  in  the  United  States ; 
another,  of  all  the  grain  elevators ;  another,  of  all  the  oil  terri- 
tory;  another,  of  all  the  salt-producing  regions ;  another,  of  all 
the  cotton  mills ;  and  another,  of  all  the  great  establishments 
for  slaughtering  animals  and  the  preparation  of  meats.  What 
power  is  competent  to  protect  the  people  of  the  United  States 
against  such  dangers  except  a  national  power,  —  one  that  is 
capable  of  exerting  its  sovereign  authority  throughout  every 
part  of  the  territory  and  over  all  the  people  of  the  nation  ? 

To  the  general  government  has  been  committed  the  control 
of  commercial  intercourse  among  the  states,  to  the  end  that  it 
may  be  free  at  all  times  from  any  restraints  except  such  as  con- 
gress may  impose  or  permit  for  the  benefit  of  the  whole  coun- 
try. The  common  government  of  all  the  people  is  the  only  one 
that  can  adequately  deal  with  a  matter  which  directly  and 
injuriously  affects  the  entire  commerce  of  the  country,  which 
concerns  equally  all  the  people  of  the  Union,  and  which,  it 
must  be  confessed,  cannot  be  adequately  controlled  by  any  one 
state.  Its  authority  should  not  be  so  weakened  by  construction 
that  it  cannot  reach  and  eradicate  evils  that,  beyond  all  ques- 
tion, tend  to  defeat  an  object  which  that  government  is  entitled, 
by  the  constitution,  to  accomplish. 

Powerful  and  ingenious  minds,  [this  court  has  said,]  taking,  as  pos- 
tulates, that  the  powers  expressly  granted  to  the  government  of  the 


EARLY   SUPREME   COURT   DECISIONS:    1890-1901      533 

Union  are  to  be  contracted  by  construction  into  the  narraax'st  possible 
compass,  and  that  the  original  powers  of  the  states  are  retained,  if 
any  possible  construction  will  retain  them,  may,  by  a  course  of  well- 
digested  but  refined  and  metaphysical  reasoning,  founded  on  these 
premises,  explain  away  the  constitution  of  our  country,  and  leave  it  a 
magnificent  structure,  indeed,  to  look  at,  but  totally  unfit  for  use. 
They  may  so  entangle  and  perplex  the  understanding  as  to  obscure 
principles  which  were  before  thought  quite  plain,  and  induce  doubts 
where,   if  the  mind   were  to  pursue  its  own  course,  none  would  be 

perceived. 

Gibbons  v.  Ogdcn,  9  Wheat,  i,  222. 

While  a  decree  annulling  the  contracts  under  which  the  com- 
bination in  question  was  formed  may  not,  in  view  of  the  facts 
disclosed,  be  effectual  to  accomplish  the  object  of  the  act  of 
1890,  I  perceive  no  diflficulty  in  the  way  of  the  court  passing  a 
decree  declaring  that  that  combination  imposes  an  unlawful 
restraint  upon  trade  and  commerce  among  the  states,  and  per- 
petually enjoining  it  from  further  prosecuting  any  business  pur- 
suant to  the  unlawful  agreements  under  which  it  was  formed, 
or  by  which  it  was  created.  Such  a  decree  would  be  within  the 
scope  of  the  bill,  and  is  appropriate  to  the  end  which  congress 
intended  to  accomplish,  namely,  to  protect  the  freedom  of  com- 
mercial intercourse  among  the  states  against  combinations  and 
conspiracies  which  impose  unlawful  restraints  upon  such  inter- 
course. 

For  the  reasons  stated,  I  dissent  from  the  opinion  and  judg- 
ment of  the  court. 

THE   ADDYSTONE   PIPE   CASE  1 

Assuming,  for  the  purpose  of  the  argument,  that  the  contract 
in  question  herein  does  directly  and  substantially  operate  as  a 
restraint  upon  and  as  a  regulation  of  interstate  commerce,  it  is 
yet  insisted  by  the  appellants  at  the  threshold  of  the  inquiry  that 
by  the  true  construction  of  the  Constitution,  the  power  of  Con- 
gress to  regulate  interstate  commerce  is  limited  to  its  protection 

1  Addystone  Pipe  &  Steel  Co.  v.  U.  S.,  175  U.  S.  211;  20  Supreme  Court  Reporter, 
97;  rendered  December  4,  1899.  The  material  facts  are  set  forth  in  Chapter  IV, 
sujira,  and  are  therefore  omitted  herein.     This  states  merely  the  law. 


534  TRUSTS,    POOLS   AND   CORPORATIONS 

from  acts  of  interference  by  state  legislation  or  by  means  of  reg- 
ulations made  under  the  authority  of  the  state  by  some  politi- 
cal subdivision  thereof,  including  also  congressional  power  over 
common  carriers,  elevator,  gas,  and  water  companies,  for  reasons 
stated  to  be  peculiar  to  such  carriers  and  companies,  but  that  it 
does  not  include  the  general  power  to  interfere  with  or  prohibit 
private  contracts  between  citizens,  even  though  such  contracts 
have  interstate  commerce  for  their  object,  and  result  in  a  direct 
and  substantial  obstruction  to  or  regulation  of  that  commerce. 

This  argument  is  founded  upon  the  assertion  that  the  reason 
for  vesting  in  Congress  the  power  to  regulate  commerce  was  to 
insure  uniformity  of  regulation  against  conflicting  and  discrim- 
inating state  legislation  ;  and  the  further  assertion  that  the  Con- 
stitution guarantees  liberty  of  private  contract  to  the  citizen,  at 
least  upon  commercial  subjects,  and  to  that  extent  the  guaranty 
operates  as  a  limitation  on  the  power  of  Congress  to  regulate 
commerce. 

Under  this  grant  of  power  to  Congress,  that  body,  in  our  judg- 
ment, may  enact  such  legislation  as  shall  declare  void  and  pro- 
hibit the  performance  of  any  contract  between  individuals  or 
corporations  where  the  natural  and  direct  effect  of  such  a  con- 
tract will  be,  when  carried  out,  to  directly,  and  not  as  a  mere  in- 
cident to  other  and  innocent  purposes,  regulate  to  any  substantial 
extent  interstate  commerce.  (And  when  we  speak  of  interstate 
we  also  include  in  our  meaning  foreign  commerce.)  We  do  not 
assent  to  the  correctness  of  the  proposition  that  the  constitutional 
guaranty  of  liberty  to  the  individual  to  enter  into  private  con- 
tracts limits  the  power  of  Congress  and  prevents  it  from  legislat- 
ing upon  the  subject  of  contracts  of  the  class  mentioned. 

The  power  of  Congress  over  this  subject  seems  to  us  much 
more  important  and  necessary  than  the  liberty  of  the  citizen  to 
enter  into  contracts  of  the  nature  above  mentioned,  free  from  the 
control  of  Congress,  because  the  direct  results  of  such  contracts 
might  be  the  regulation  of  commerce  among  the  states,  possibly 
quite  as  effectually  as  if  a  state  had  passed  a  statute  of  like 
tenor  as  the  contract. 

It  is,  indeed,  urged  that  to  include  private  contracts  of  this 
description  within  the  grant  of  this  power  to  Congress  is  to  take 


EARLY   SUPREME   COURT   DECISIONS:    1890-1901      535 

from  the  states  their  own  power  over  the  subject,  atitl^to  interfere 
with  the  liberty  of  the  individual  in  a  manner  and  to  an  extent 
never  contemplated  by  the  framers  of  the  Constitution,  and  not 
fairly  justified  by  any  language  used  in  that  instrument.  If  Con- 
gress has  not  the  power  to  legislate  upon  the  subject  of  contracts 
of  the  kind  mentioned,  because  the  constitutional  provision  as  to 
the  liberty  of  the  citizen  limits,  to  that  extent,  its  power  to  regu- 
late interstate  commerce,  then  it  would  seem  to  follow  that  the 
several  states  have  that  power,  although  such  contracts  relate  to 
interstate  commerce,  and,  more  or  less,  regulate  it.  If  neither 
Congress  nor  the  state  legislatures  have  such  power,  then  we  are 
brought  to  the  somewhat  extraordinary  position  that  there  is  no 
authority,  state  or  national,  which  can  legislate  upon  the  subject 
of  or  prohibit  such  contracts.     This  cannot  be  the  case. 

If  it  should  be  held  that  Congress  has  no  power  and  the  state 
legislatures  have  full  and  complete  authority  to  thus  far  regulate 
interstate  commerce  by  means  of  their  control  over  private  con- 
tracts between  individuals  or  corporations,  then  the  legislation 
of  the  different  states  might  and  probably  would  differ  in  regard 
to  the  matter,  according  to  what  each  state  might  regard  as  its 
own  particular  interest.  One  state  might  condemn  all  kinds  of 
contracts  of  the  class  described,  while  another  might  permit  the 
making  of  all  them,  while  still  another  might  permit  some  and 
prohibit  others,  and  thus  great  confusion  would  ensue,  and  it 
would  be  difficult  in  many  cases  to  know  just  what  law  was  ap- 
plicable to  any  particular  contract  regarding  and  regulating  in- 
terstate commerce.  At  the  same  time  contracts  might  be  made 
between  individuals  or  corporations  of  such  extent  and  magni- 
tude as  to  seriously  affect  commerce  among  the  states.  These 
consequences  would  seemingly  necessarily  follow  if  it  were  de- 
cided that  the  state  legislatures  had  control  over  the  subject  to 
the  extent  mentioned. 

It  is  true,  so  far  as  we  are  informed,  that  no  state  legislature 
has  heretofore  authorized  by  affirmative  legislation  the  making 
of  contracts  upon  the  matter  of  interstate  commerce  of  the  nature 
now  under  discussion.  Nor  has  it,  in  terms,  condemned  them. 
The  reason  why  no  state  legislation  upon  the  subject  has  been 
enacted  has  probably  been  because  it  was  supposed  to  be  a  sub- 


536  TRUSTS,    POOLS   AND   CORPORATIONS 

ject  over  which  state  legislatures  have  no  jurisdiction.  If  it  should 
be  decided  that  they  have,  then  the  course  of  legislation  of  the 
different  states  on  this  subject  would  probably  be  as  varied  as 
we  have  already  indicated. 

But  upon  the  matter  of  interstate  and  foreign  commerce  and 
the  proper  regulation  thereof,  the  subject  being  not  alone  national 
but  international  in  its  character,  the  great  importance  of  having 
but  one  source  for  the  law  which  regulates  that  commerce 
throughout  the  length  and  breadth  of  the  land  cannot,  in  our 
opinion,  be  overestimated.  Each  state  in  that  event  would  have 
complete  jurisdiction  over  the  commerce  which  was  wholly  within 
its  own  borders,  while  the  jurisdiction  of  Congress,  under  the 
provisions  of  the  Constitution,  over  interstate  commerce  would 
be  paramount,  and  would  include  therein  jurisdiction  over  con- 
tracts of  the  nature  we  have  been  discussing. 

We  conclude  that  the  plain  language  of  the  grant  to  Congress 
of  power  to  regulate  commerce  among  the  several  states  includes 
power  to  legislate  upon  the  subject  of  those  contracts  in  respect 
to  interstate  or  foreign  commerce  which  directly  affect  and 
regulate  that  commerce,  and  we  can  find  no  reasonable  ground 
for  asserting  that  the  constitutional  provision  as  to  the  liberty  of 
the  individual  limits  the  extent  of  that  power,  as  claimed  by  the 
appellants.  We  therefore  think  the  appellants  have  failed  in 
their  contention  upon  this  branch  of  the  subject. 

We  are  thus  brought  to  the  question  whether  the  contract  or 
combination  proved  in  this  case  is  one  which  is  either  a  direct 
restraint  or  a  regulation  of  commerce  among  the  several  states 
or  with  foreign  nations  contrary  to  the  act  of  Congress.  It  is 
objected  on  the  part  of  the  appellants  that  even  if  it  affected 
interstate  commerce  the  contract  or  combination  was  only  a 
reasonable  restraint  upon  a  ruinous  competition  among  them- 
selves, and  was  formed  only  for  the  purpose  of  protecting  the 
parties  thereto  in  securing  prices  for  their  product  that  were 
fair  and  reasonable  to  themselves  and  the  public.  It  is  further 
objected  that  the  agreement  does  not  come  within  the  act  be- 
cause it  is  not  one  which  amounts  to  a  regulation  of  interstate 
commerce,  as  it  has  no  direct  bearing  upon  or  relation  to  that 
commerce,  but  that,  on  the  contrary,  the  case  herein  involves 


EARLY   SUPREME   COURT    DECISIONS:    1890-1901     537 

the  same  principles  which  were  under  consideratititi  in  United 
States  V.  E.  C.  KnigJit  Co.,^  and,  in  accordance  with  that 
decision,  the  bill  should  be  dismissed. 

Referring  to  the  first  of  these  objections  to  the  maintenance 
of  this  proceeding,  we  are  of  opinion  that  the  agreement  or 
combination  was  not  one  which  simply  secured  for  its  members 
fair  and  reasonable  prices  for  the  article  dealt  in  by  them. 
Even  if  the  objection  thus  set  up  would,  if  well  founded  in  fact, 
constitute  a  defense,  we  agree  with  the  circuit  court  of  appeals 
in  its  statement  of  the  special  facts  upon  this  branch  of  the  case 
and  with  its  opinion  thereon  as  set  forth  by  Circuit  Judge  Taft, 
as  follows : 

The  defendants,  being  manufacturers  and  vendors  of  cast-iron  pipe, 
entered  into  a  combination  to  raise  the  prices  for  pipe  for  all  the 
states  west  and  south  of  New  York,  Pennsylvania,  and  Virginia,  con- 
stituting considerably  more  than  three  quarters  of  the  territory  of  the 
United  States  and  significantly  called  by  the  associates  "  pay  "  territory. 
Their  joint  annual  output  was  220,000  tons.  The  total  capacity  of  all 
the  other  cast-iron  pipe  manufacturers  in  the  pay  territory  was  170,500 
tons.  Of  this,  45,000  tons  was  the  capacity  of  mills  in  Texas,  Colo- 
rado, and  Oregon,  so  far  removed  from  that  part  of  the  pay  territory 
where  the  demand  was  considerable  that  necessary  freight  rates  ex- 
cluded them  from  the  possibility  of  competing,  and  12,000  tons  was 
the  possible  annual  capacity  of  a  mill  at  St.  Louis,  which  was  practi- 
cally under  the  same  management  as  that  of  one  of  the  defendants' 
mills.  Of  the  remainder  of  the  mills  in  pay  territory  and  outside  of 
the  combination,  one  was  at  Columbus,  Ohio,  two  in  northern  Ohio, 
and  one  in  Michigan.  Their  aggregate  possible  annual  capacit)''  was 
about  one  half  the  usual  annual  output  of  the  defendants'  mills.  They 
were,  it  will  be  observed,  at  the  extreme  northern  end  of  the  pay  terri- 
tory, while  the  defendants'  mills  at  Cincinnati,  Louisville,  Chattanooga 
and  South  Pittsburg,  and  Anniston  and  Bessemer  were  grouped  much 
nearer  to  the  center  of  the  pay  territory.  The  freight  upon  cast-iron 
pipe  amounts  to  a  considerable  percentage  of  the  price  at  which 
manufacturers  can  deliver  it  at  any  great  distance  from  the  place  of 
manufacture.  Within  the  margin  of  the  freight  per  ton  which  eastern 
manufacturers  would  have  to  pay  to  deliver  pipe  in  pay  territory  the 
defendants,  by  controlling  two  thirds  of  the  output  in  pay  territory, 
were  practically  able  to  fix  prices.     The  competition  of  the  Ohio  and 

1  P.  506,  supra. 


538  TRUSTS,   POOLS   AND   CORPORATIONS 

Michigan  mills  of  course  somewhat  affected  their  power  in  this  respect 
in  the  northern  part  of  the  pay  territory,  but  the  farther  south  the 
place  of  deUvery  was  to  be,  the  more  complete  the  monopoly  over  the 
trade  which  the  defendants  were  able  to  exercise  within  the  limits  al- 
ready described.  Much  evidence  is  adduced  upon  affidavit  to  prove 
that  defendants  had  no  power  arbitrarily  to  fix  prices  and  that  they 
were  always  obliged  to  meet  competition.  To  the  extent  that  they 
could  not  impose  prices  on  the  public  in  excess  of  the  cost  price  of 
pipe  with  freight  from  the  Atlantic  seaboard  added  this  is  true,  but 
within  that  limit  they  could  fix  prices  as  they  chose.  The  most  cogent 
evidence  that  they  had  this  power  is  the  fact  everywhere  apparent  in 
the  record  that  they  exercised  it.  The  details  of  the  way  in  which  it 
was  maintained  are  somewhat  obscured  by  the  manner  in  which  the 
proof  was  adduced  in  the  court  below,  upon  ^davits  solely  and  with- 
out the  clarifying  effect  of  cross-examination,  but  quite  enough  appears 
to  leave  no  doubt  of  the  ultimate  fact. 

The  defendants  were  by  their  combination  therefore  able  to  deprive 
the  public  in  a  large  territory  of  the  advantages  otherwise  accruing  to 
them  from  the  proximity  of  defendants'  pipe  factories,  and,  by  keeping 
prices  just  low  enough  to  prevent  competition  by  eastern  manufac- 
turers, to  compel  the  public  to  pay  an  increase  over  what  the  price 
would  have  been  if  fixed  by  competition  between  the  defendants, 
nearly  equal  to  the  advantage  in  freight  rates  enjoyed  by  defendants 
over  eastern  competitors.  The  defendants  acquired  this  power  by 
voluntarily  agreeing  to  sell  only  at  prices  fixed  by  their  committee, 
and  by  allowing  the  highest  bidder  at  the  secret  auction  pool  to  be- 
come the  lowest  bidder  of  them  at  the  public  letting.  Now  the  re- 
straint thus  imposed  on  themselves  was  only  partial,  it  did  not  cover 
the  United  States,  there  was  not  a  complete  monopoly.  It  M-as 
tempered  by  the  fear  of  competition  and  it  affected  only  a  part  of  the 
price.  But  this  certainly  does  not  take  the  contract  of  association  out 
of  the  annulling  effect  of  the  rule  against  monopolies.  In  United 
States  V.  E.  C.  Knight  Co.,  156  U.  S.  i,  16,  39  L.  ed.  325,  330,  15  Sup. 
Ct.  Rep.  249,  Chief  Justice  Fuller,  in  speaking  for  the  court,  said: 
"  Again,  all  the  authorities  agree  that  in  order  to  vitiate  a  contract  or 
combination  it  is  not  essential  that  its  result  should  be  a  complete 
monopoly  ;  it  is  sufficient  if  it  really  tends  to  that  end  and  to  deprive 
the  public  of  the  advantages  which  flow  from  free  competition." 

It  has  been  earnestly  pressed  upon  us  that  the  prices  at  which  the 
cast-iron  pipe  was  sold  in  pay  territory  were  reasonable.  A  great 
many  affidavits  of  purchasers  of  pipe  in  pay  territory,  all  drawn  by  the 


EARLY   SUPREME    COURT   DECISIONS:    1890-1901      539 

same  hand  or  from  the  same  model,  are  produced,  -ivr  which  the 
affiants  say  that  in  their  opinion  the  prices  at  which  pipe  has  been 
sold  by  the  defendants  have  been  reasonable.  We  do  not  think  the 
issue  an  important  one,  because,  as  already  stated,  we  do  not  think 
that  at  common  law  there  is  any  question  of  reasonableness  open 
to  the  courts  with  reference  to  such  a  contract.  Its  tendency  was 
certainly  to  give  to  the  defendants  the  power  to  charge  unreasonable 
prices,  had  they  chosen  to  do  so.  But  if  it  were  important  we  should 
unhesitatingly  lind  that  the  prices- charged  in  the  instances  which 
were  in  evidence  were  unreasonable.  The  letters  from  the  manager 
of  the  Chattanooga  foundry,  written  to  the  other  defendants  and  dis- 
cussing the  prices  fixed  by  the  association,  do  not  leave  the  slightest 
doubt  upon  this  point,  and  outweigh  the  perfunctory  affidavits  pro- 
duced by  the  defendants.  The  cost  of  producing  pipe  at  Chattanooga, 
together  with  a  reasonable  profit,  did  not  exceed  $15  a  ton.  It  could 
have  been  delivered  at  Atlanta  at  $17  to  ^18  a  ton,  and  yet  the  lowest 
price  which  that  foundry  was  permitted  by  the  rules  of  the  association 
to  bid  was  $24.25.  The  same  thing  was  true  all  through  pay  territory 
to  a  greater  or  less  degree,  and  especially  at  reserved  cities. 

54  U.  S.  App.  723,  85    Fed.    Rep.   271,  29 
C.  C.  A.  141,  46  L.  R.  A.  122. 

The  facts  thus  set  forth  show  conclusively  that  the  effect  of 
the  combination  was  to  enhance  prices  beyond  a  sum  which  was 
reasonable,  and  therefore  the  first  objection  above  set  forth  need 
not  be  further  noticed. 

We  are  also  of  the  opinion  that  the  direct  effect  of  the  agree- 
ment or  combination  is  to  regulate  interstate  commerce,  and  the 
case  is  therefore  not  covered  by  that  of  United  States  v.  E.  C. 
Knight  Co.,  156  U.  S.  i,  36  L.  ed.  325,  15  Sup.  Ct.  Rep.  249. 
It  was  there  held  that  although  the  American  Sugar  Refining 
Company,  by  means  of  the  combination  referred  to,  had  ob- 
tained a  practical  monopoly  of  the  business  of  manufacturing 
sugar,  yet  the  act  of  Congress  did  not  touch  the  case,  because 
the  combination  only  related  to  manufacture,  and  not  to  com- 
merce among  the  states  or  with  foreign  nations.  The  plain  dis- 
tinction between  manufacture  and  commerce  was  pointed  out, 
and  it  was  observed  that  a  contract  or  combination  which 
directly  related  to  manufacture  only  was  not  brought  within  the 
purview    of   the    act,   although,   as   an   indirect  and    incidental 


540  TRUSTS,    POOLS   AND    CORPORATIONS 

result  of  such  combination,  commerce  among  the  states  might 
be  thereafter  somewhat  affected.  Mr.  Chief  Justice  Fuller,  in 
delivering  the  opinion  of  the  court,  spoke  of  the  distinction 
between  the  two  subjects,  and  said: 

The  argument  is  that  the  power  to  control  the  manufacture  of 
refined  sugar  is  a  monopoly  over  a  necessity  of  life,  to  the  enjoyment 
of  which  by  a  large  part  of  the  population  of  the  United  States  inter- 
state commerce  is  indispensable,  and  that  therefore  the  general 
government,  in  the  exercise  of  the  power  to  regulate  commerce,  may 
repress  such  monopoly  directly  and  set  aside  the  instruments  which 
have  created  it. 

Doubtless,  the  power  to  control  the  manufacture  of  a  given  thing 
involves  in  a  certain  sense  the  control  of  its  disposition,  but  this  is  a 
secondary  and  not  the  primary  sense  ;  and  although  the  exercise  of 
that  power  may  result  in  bringing  the  operation  of  commerce  into 
play,  it  does  not  control  it,  and  affects  it  only  incidentally  and  in- 
directly. Commerce  succeeds  to  manufacture  and  is  not  a  part  of  it. 
******** 

It  will  be  perceived  how  far-reaching  the  proposition  is  that  the 
power  of  dealing  with  a  monopoly  directly  may  be  exercised  by  the 
general  government  whenever  interstate  or  international  commerce 
may  be  ultimately  affected.  The  regulation  of  commerce  applies  to 
the  subjects  of  commerce,  and  not  to  matters  of  internal  police.  Con- 
tracts to  buy,  sell,  or  exchange  goods  to  be  transported  among  the 
several  states,  the  transportation  and  its  instrumentalities,  and  arti- 
cles bought,  sold,  or  exchanged  for  the  purposes  of  such  transit 
among  the  states,  or  put  in  the  way  of  transit,  may  be  regulated,  but 
this  is  because  they  form  part  of  interstate  trade  or  commerce.  The 
fact  that  an  article  is  manufactured  for  export  to  another  state  does 
not  of  itself  make  it  an  article  of  interstate  commerce,  and  the  intent 
of  the  manirfacturer  does  not  determine  the  time  when  the  article  or 
product  passes  from  the  control  of  the  state  and  belongs  to  commerce. 
******** 

There  was  nothing  in  the  proofs  to  indicate  any  intention  to  put  a 
restraint  upon  trade  or  commerce,  and  the  fact,  as  we  have  seen,  that 
trade  or  commerce  might  be  indirectly  affected,  was  not  enough  to 
entitle  complainants  to  a  decree. 

The  direct  purpose  of  the  combination  in  the  Knight  Case 
was  the  control  of  the  manufacture  of  sugar.     There  was  no 


EARLY   SUPREME   COURT    DECISIONS:    1890-1901     541 

combination  or  at,n-ecmcnt,  in  terms,  rei^ardinf^  the^-future  dis- 
position of  the  manufactured  article;  nothing  looking  to  a  trans- 
action in  the  nature  of  interstate  commerce.  The  probable 
intention  on  the  part  of  the  manufacturer  of  the  sugar  to  there- 
after dispose  of  it  by  sending  it  to  some  market  in  another  state 
was  held  to  be  immaterial  and  not  to  alter  the  character  of  the 
combination.  The  various  cases  which  had  been  decided  in 
this  court  relating  to  the  subject  of  interstate  commerce,  and  to 
the  difference  between  that  and  the  manufacture  of  commodi- 
ties, and  also  the  police  power  of  the  states  as  affected  by  the 
commerce  clause  of  the  Constitution,  were  adverted  to,  and 
the  case  was  decided  upon  the  principle  that  a  combination 
simply  to  control  manufacture  was  not  a  violation  of  the  act  of 
Congress,  because  such  a  contract  or  combination  did  not  directly 
control  or  affect  interstate  commerce,  but  that  contracts  for  the 
sale  and  transportation  to  other  states  of  specific  articles  were 
proper  subjects  for  regulation  because  they  did  form  part  of 
such  commerce. 

We  think  the  case  now  before  us  involves  contracts  of  the 
nature  last  above  mentioned,  not  incidentally  or  collaterally,  but 
as  a  direct  and  immediate  result  of  the  combination  engaged  in 
by  the  defendants. 

While  no  particular  contract  regarding  the  furnishing  of  pipe 
and  the  price  for  which  it  should  be  furnished  was  in  the  con- 
templation of  the  parties  to  the  combination  at  the  time  of  its 
formation,  yet  it  was  their  intention,  as  it  was  the  purpose  of 
the  combination,  to  directly  and  by  means  of  such  combination 
increase  the  price  for  which  all  contracts  for  the  delivery  of 
pipe  within  the  territory  above  described  should  be  made,  and 
the  latter  result  was  to  be  achieved  by  abolishing  all  competi- 
tion between  the  parties  to  the  combination.  The  direct  and 
immediate  result  of  the  combination  was  therefore  necessarily 
a  restraint  upon  interstate  commerce  in  respect  of  articles  manu- 
factured by  any  of  the  parties  to  it  to  be  transported  beyond  the 
state  in  which  they  were  made.  The  defendants  by  reason  of 
this  combination  and  agreement  could  only  send  their  goods 
out  of  the  state  in  which  they  were  manufactured  for  sale  and 
delivery  in  another  state,  upon  the  terms  and  pursuant  to  the 


542  TRUSTS,   POOLS  AND   CORPORATIONS 

provisions  of  such  combination.  As  pertinently  asked  by  the 
court  below,  Was  not  this  a  direct  restraint  upon  interstate  com- 
merce in  those  goods  ? 

If  dealers  in  any  commodity  agreed  among  themselves  that 
any  particular  territory  bounded  by  straight  lines  should  be  fur- 
nished with  such  commodity  by  certain  members  only  of  the 
combination,  and  the  others  would  abstain  from  business  in  that 
territory,  would  not  such  agreement  be  regarded  as  one  in  re- 
straint of  interstate  trade  ?  If  the  price  of  the  commodity  were 
thereby  enhanced  (as  it  naturally  would  be),  the  character  of 
the  agreement  would  be  still  more  clearly  one  in  restraint  of 
trade.  Is  there  any  substantial  difference  where  by  agreement 
among  themselves  the  parties  choose  one  of  their  number  to 
make  a  bid  for  the  supply  of  the  pipe  for  delivery  in  another 
state,  and  agree  that  all  other  bids  shall  be  for  a  larger  sum, 
thus  practically  restricting  all  but  the  member  agreed  upon 
from  any  attempt  to  supply  the  demand  for  the  pipe  or  to  enter 
into  competition  for  the  business  ?  Does  not  an  agreement  or 
combination  of  that  kind  restrain  interstate  trade,  and  when 
Congress  has  acted  by  the  passage  of  a  statute  like  the  one 
under  consideration,  does  not  such  a  contract  clearly  violate 
that  statute .-' 

As  has  frequently  been  said,  interstate  commerce  consists  of 
intercourse  and  traffic  between  the  citizens  or  inhabitants  of 
different  states,  and  includes  not  only  the  transportation  of  per- 
sons and  property  and  the  navigation  of  public  waters  for  that 
purpose,  but  also  the  purchase,  sale,  and  exchange  of  commod- 
ities. If,  therefore,  an  agreement  or  combination  directly  re- 
strains not  alone  the  manufacture,  but  the  purchase,  sale,  or 
exchange  of  the  manufactured  commodity  among  the  several 
states,  it  is  brought  within  the  provisions  of  the  statute.  The 
power  to  regulate  such  commerce,  that  is,  the  power  to  pre- 
scribe the  rules  by  which  it  shall  be  governed,  is  vested  in  Con- 
gress, and  when  Congress  has  enacted  a  statute  such  as  the  one 
in  question,  any  agreement  or  combination  which  directly  oper- 
ates, not  alone  upon  the  manufacture,  but  upon  the  sale,  trans- 
portation, and  delivery  of  an  article  of  interstate  commerce,  by 
preventing  or  restricting  its  sale,  etc.,  thereby  regulates  inter- 


EARLY   SUPREME   COURT   DECISIONS:    1890-1901      543 

state  commerce  to  that  extent,  and  to  the  same  extiiat  trenches 
upon  the  power  of  the  national  legislature  and  violates  the 
statute.  We  think  it  plain  that  this  contract  or  combination 
effects  that  result. 

The  defendants  allege,  and  it  is  true,  that  their  business  is 
not  like  a  factory  manufacturing  an  article  of  a  certain  kind  for 
which  there  is  at  all  times  a  demand,  and  which  is  manufac- 
tured without  any  regard  to  a  particular  sale  or  for  a  particular 
customer.  In  this  respect  as  in  many  others  the  business  dif- 
fers radically  from  the  sugar  refiners.  The  business  of  defend- 
ants is  carried  on  by  obtaining  particular  contracts  for  the  sale, 
transportation,  and  delivery  of  iron  pipe  of  a  certain  description, 
quality,  and  strength,  differing  in  different  contracts  as  the  in- 
tended use  may  differ.  These  contracts  are,  generally  speak- 
ing, obtained  at  a  public  letting,  at  which  there  are  many 
competitors,  and  the  contract  bid  for  includes,  in  its  terms,  the 
sale  of  the  pipe,  and  its  delivery  at  the  place  desired,  the  cost 
of  transportation  being  included  in  the  purchase  price  of  the 
pipe.  The  contract  is  one  for  the  sale  and  delivery  of  a  certain 
kind  of  pipe,  and  it  is  not  generally  essential  to  its  performance 
that  it  should  be  manufactured  for  that  particular  contract, 
although  sometimes  it  may  be. 

If  the  successful  bidder  had  on  hand  iron  pipe  of  the  kind 
specified,  or  if  he  could  procure  it  by  purchase,  he  could  in 
most  cases  deliver  such  pipe  in  fulfillment  of  his  contract  just 
the  same  as  if  he  manufactured  the  pipe  subsequently  to  the 
making  of  the  contract  and  for  the  specific  purpose  of  its  per- 
formance. It  is  the  sale  and  delivery  of  a  certain  kind  and 
quality  of  pipe,  and  not  the  manufacture,  which  is  the  material 
portion  of  the  contract,  and  a  sale  for  delivery  beyond  the  state 
makes  the  transaction  a  part  of  interstate  commerce.  Munici- 
pal corporations  and  gas,  railroad,  and  water  companies  are 
among  the  chief  customers  for  the  pipe,  and  when  they  desire 
the  article  they  give  notice  of  the  kind  and  quality,  size, 
strength,  and  purpose  for  which  the  pipe  is  desired,  and  an- 
nounce they  will  receive  proposals  for  furnishing  the  same  at 
the  place  indicated  by  them.  Into  this  contest  (and  irrespec- 
tive of  the  reserved  cities)  the  defendants  enter,  not  in  truth  as 


544  TRUSTS,    POOLS   AND    CORPORATIONS 

competitors,  but  under  an  agreement  or  combination  among 
themselves  which  eliminates  all  competition  between  them  for 
the  contract,  and  permits  one  of  their  number  to  make  his  own 
bid  and  requires  the  others  to  bid  over  him.  In  certain  sections 
of  the  country  the  defendants  would  have,  by  reason  of  their 
situation,  such  an  advantage  over  all  other  competitors  that 
there  would  practically  be  no  chance  for  any  other  than  one  of 
their  number  to  obtain  the  contract,  unless  the  price  bid  was  so 
exorbitant  as  to  give  others  not  so  favorably  situated  an  oppor- 
tunity to  snatch  it  from  their  hands.  Under  these  circum- 
stances, the  agreement  or  combination  of  the  defendants,  en- 
tered into  for  that  express  purpose  and  to  directly  obtain  that 
desired  result,  would  inevitably  and  necessarily  give  to  the  de- 
fendant, who  was  agreed  upon  among  themselves  to  make  the 
lowest  bid,  the  contract  desired  and  at  a  higher  price  than 
otherwise  would  have  been  obtained,  and  all  the  other  parties 
to  the  combination  would,  by  virtue  of  its  terms,  be  restricted 
from  an  attempt  to  obtain  the  contract. 

The  combination  thus  had  a  direct,  immediate,  and  intended 
relation  to  and  effect  upon  the  subsequent  contract  to  sell  and 
deliver  the  pipe.  It  was  to  obtain  that  particular  and  specific 
result  that  the  combination  was  formed,  and  but  for  the  restric- 
tion the  resulting  high  prices  for  the  pipe  would  not  have  been 
obtained.  It  is  useless  for  the  defendants  to  say  they  did 
not  intend  to  regulate  or  affect  interstate  commerce.  They  in- 
tended to  make  the  very  combination  and  agreement  which  they 
in  fact  did  make,  and  they  must  be  held  to  have  intended  (if  in 
such  case  intention  is  of  the  least  importance)  the  necessary  and 
direct  result  of  their  agreement. 

It  is  also  urged  that  as  but  one  contract  would  be  awarded 
for  the  work  proposed  at  any  place,  and  therefore  only  one 
person  would  secure  it  by  virtue  of  being  the  lowest  bidder,  the 
selection  by  defendants  of  one  of  their  number  to  make  the 
lowest  bid  as  among  themselves  could  not  operate  as  any  re- 
straint of  trade ;  that  the  combination  or  agreement  operated 
only  to  make  a  selection  of  that  one  who  should  have  the  con- 
tract by  being  the  lowest  bidder,  and  it  did  not  in  the  most  re- 
mote degree  itself  limit  the  number  or  extent  of  contracts,  and 


EARLY   SUPREME   COURT   DECISIONS:    1890-1901      545 

therefore  could  not  operate  to  restrain  interstate  tracle.  This 
takes  no  heed  of  the  purpose  and  effect  of  the  combination  to 
restrain  the  action  of  the  parties  to  it  so  that  there  shall  be  no 
competition  among  them  to  obtain  the  contract  for  themselves. 

We  have  no  doubt  that  where  the  direct  and  immediate  effect 
of  a  contract  or  combination  among  particular  dealers  in  a  com- 
modity is  to  destroy  competition  between  them  and  others,  so 
that  the  parties  to  the  contract  or  combination  may  obtain  in- 
creased prices  for  themselves,  such  contract  or  combination 
amounts  to  a  restraint  of  trade  in  the  commodity,  even  though 
contracts  to  buy  such  commodity  at  the  enhanced  price  are  con- 
tinually being  made.  Total  suppression  of  the  trade  in  the  com- 
modity is  not  necessary  in  order  to  render  the  combination  one 
in  restraint  of  trade.  It  is  the  effect  of  the  combination  in 
Hmiting  and  restricting  the  right  of  each  of  the  members  to 
transact  business  in  the  ordinary  way,  as  well  as  its  effect  upon 
the  volume  or  extent  of  the  dealing  in  the  commodity,  that  is 
regarded.  All  the  facts  and  circumstances  are,  however,  to  be 
considered  in  order  to  determine  the  fundamental  question  — 
whether  the  necessary  effect  of  the  combination  is  to  restrain 
interstate  commerce. 

If  iron  pipe  cost  $100  a  ton  instead  of  the  prices  which  the 
record  shows  were  paid  for  it,  no  one,  we  think,  would  contend 
that  the  trade  in  it  would  amount  to  as  much  as  if  the  lower 
prices  prevailed.  The  higher  price  would  operate  as  a  direct 
restraint  upon  the  trade,  and  therefore  any  contract  or  combina- 
tion which  enhanced  the  price  might  in  some  degree  restrain  the 
trade  in  the  article.  It  is  not  material  that  the  combination  did 
not  prevent  the  letting  of  any  particular  contract.  Such  was  not 
its  purpose.  On  the  contrary,  the  more  contracts  to  be  let,  the 
better  for  the  combination.  It  was  formed  not  for  the  object  of 
preventing  the  letting  of  contracts,  but  to  restrain  the  parties  to 
it  from  competing  for  contracts,  and  thereby  to  enhance  the 
prices  to  be  obtained  for  the  pipe  dealt  in  by  those  parties.  And 
when  by  reason  of  the  combination  a  particular  contract  may 
have  been  obtained  for  one  of  the  parties  thereto,  but  at  a 
higher  price  than  would  otherwise  have  been  paid,  the  charge 
that  the  combination  was  one  in   restraint  of  trade  is  not  an- 


546  TRUSTS,   POOLS  AND   CORPORATIONS 

swered  by  the  statement  that  the  particular  contract  was  in 
truth  obtained  and  not  prevented.  The  parties  to  such  a  com- 
bination might  realize  more  profit  by  the  higher  prices  they 
would  secure  than  they  could  earn  by  doing  more  work  at  a 
much  less  price.  The  question  is  as  to  the  effect  of  such  com- 
bination upon  the  trade  in  the  article,  and  if  that  effect  be  to 
destroy  competition  and  thus  advance  the  price,  the  combination 
is  one  in  restraint  of  trade. 

It  is  almost  needless  to  add  that  we  do  not  hold  that  every 
private  enterprise  which  may  be  carried  on  chiefly  or  in  part  by 
means  of  interstate  shipments  is  therefore  to  be  regarded  as  so 
related  to  interstate  commerce  as  to  come  within  the  regulating 
power  of  Congress.  Such  enterprises  may  be  of  the  same 
nature  as  the  manufacturing  of  refined  sugar  in  the  Knight 
Case  —  that  is,  the  parties  may  be  engaged  as  manufacturers  of 
a  commodity  which  they  thereafter  intend  at  some  time  to  sell, 
and  possibly  to  sell  in  another  state;  but  such  sale  we  have 
already  held  is  an  incident  to  and  not  the  direct  result  of  the 
manufacture,  and  so  is  not  a  regulation  of  or  an  illegal  inter- 
ference with  interstate  commerce.  That  principal  is  not  af- 
fected by  anything  herein  decided. 

The  views  above  expressed  lead  generally  to  an  affirmance  of 
the  judgment  of  the  court  of  appeals. 


OTHER   EARLY  CASES  ^ 
Hopkins  v.  United  States 

(171  U.  S.  578;  Supreme  Court,  October  24,  1898;  Opin., 
Peckham,  J.) 

This  was  a  bill  in  equity,  filed  by  direction  of  the  Attorney- 
General,  against  Hopkins  and  other  members  of  the  Kansas 
City  Live  Stock  Exchange,  to  secure  a  dissolution  of  the  ex- 
change on  the  ground  that  its  members  were  in  a  combination 
in  restraint  of  commerce  among  the  several  states. 

1  Reply  of  the  Attorney-General  to  a  communication  from  the  Hon.  George  F. 
Hoar,  Chairman  of  the  Committee  on  the  Judiciary  of  the  United  States  Senate, 
Jan.  3,  1903. 


EARLY  SUPREME   COURT   DECISIONS:    1890-1901     547 

It  seems  that  this  exchange  was  an  association  ofmen  doing 
business  at  the  stock  yards  in  Kansas  City,  part  of  these  yards 
being  in  Missouri  and  part  in  Kansas.  The  business  of  the 
members  was  to  receive  live  stock  shipped  from  other  states, 
care  for  and  sell  the  same,  and  account  to  the  owners  for  the 
proceeds  after  deducting  charges  and  expenses.  Under  the 
rules,  members  were  prohibited  from  buying  live  stock  from 
commission  merchants  in  Kansas  City  not  members  of  the 
exchange.  The  rules  also  fixed  a  commission,  prohibited  the 
employment  of  agents  to  solicit  consignments  except  upon 
stipulated  salary,  and  forbade  the  sending  of  prepaid  telegrams 
or  telephone  messages  with  information  as  to  the  condition  of 
the  markets. 

The  Court  held  that  the  business  conducted  by  the  members 
of  the  exchange  was  not  interstate,  but  local  in  character,  and 
therefore  decided  the  case  against  the  government. 

Page  588  : 

The  sale  or  purchase  of  live  stock  as  commission  merchants  at 
Kansas  City  is  the  business  done,  and  its  character  is  not  altered 
because  the  larger  proportion  of  the  purchases  and  sales  may  be  of 
live  stock  sent  into  the  state  from  other  states  or  from  the  territories. 
Where  the  stock  came  from  or  where  it  may  ultimately  go  after  a  sale 
or  purchase,  procured  through  the  services  of  one  of  the  defendants 
at  the  Kansas  City  stock  yards,  is  not  the  substantial  factor  in  the 
case.  The  character  of  the  business  of  defendants  must,  in  this  case, 
be  determined  by  the  facts  occurring  at  that  city. 

If  an  owner  of  cattle  in  Nebraska  accompanied  them  to  Kansas 
City  and  there  personally  employed  one  of  these  defendants  to  sell  the 
cattle  at  the  stock  yards  for  him  on  commission,  could  it  be  properly 
said  that  such  defendant,  in  conducting  the  sale  for  his  principal, 
was  engaged  in  interstate  commerce?  Or  that  an  agreement  between 
himself  and  others  not  to  render  such  services  for  less  than  a  certain 
sum  was  a  contract  in  restraint  of  interstate  trade  or  commerce  ?  We 
think  not.  On  the  contrary,  we  regard  the  services  as  collateral  to 
such  commerce  and  in  the  nature  of  a  local  aid  or  facility  provided 
for  the  cattle  owner  toward  the  accomplishment  of  his  purpose  to  sell 
them,  and  an  agreement  among  those  who  render  the  services  relating 
to  the  terms  upon  which  they  will  render  them  is  not  a  contract  in 
restraint  of  interstate  trade  or  commerce. 


548  TRUSTS,    POOLS   AND    CORPORATIONS 

Page  590 : 

The  selling  of  an  article  at  its  destination,  which  has  been  sent 
from  another  state,  while  it  may  be  regarded  as  an  interstate  sale  and 
one  which  the  importer  was  entitled  to  make,  yet  the  services  of  the 
individual  employed  at  the  place  where  the  article  is  sold  are  not  so 
connected  with  the  subject  sold  as  to  make  them  a  portion  of  inter- 
state commerce,  and  a  combination  in  regard  to  the  amount  to  be 
charged  for  such  service  is  not,  therefore,  a  combination  in  restraint  of 
that  trade  or  commerce.  Granting  that  the  cattle  themselves,  because 
coming  from  another  state,  are  articles  of  interstate  commerce,  yet  it 
does  not  therefore  follow  that  before  their  sale  all  persons  performing 
services  in  any  way  connected  with  them  are  themselves  engaged  in 
that  commerce,  or  that  their  agreements  among  each  other  relative  to 
the  compensation  to  be  charged  for  their  services  are  void  as  agree- 
ments made  in  restraint  of  interstate  trade. 

Page  592 : 

The  contract  condemned  by  the  statute  is  one  whose  direct  and  im- 
mediate effect  is  a  restraint  upon  that  kind  of  trade  or  commerce 
which  is  interstate.  Charges  for  such  facilities  as  we  have  already 
mentioned  are  not  a  restraint  upon  that  trade,  although  the  total  cost 
of  marketing  a  subject  thereof  may  be  thereby  increased.  Charges 
for  facilities  furnished  have  been  held  not  a  regulation  of  commerce, 
even  when  made  for  services  rendered  or  as  compensation  for  benefits 
conferred. 

Anderson  v.  United  States 

(171  U.  S.  604;  Supreme  Court,  October  24,  1898;  Opin., 
Peckham,  J.) 

This  case  was  somewhat  similar  to  the  Hopkins  case,  being  a 
bill  in  equity  filed  by  direction  of  the  Attorney-General  against 
the  members  of  the  Traders'  Live  Stock  Exchange  of  Kansas 
City  to  compel  its  dissolution.  The  main  difference  between 
this  exchange  and  that  involved  in  the  Hopkins  case  was  that 
while  the  members  of  the  Traders'  Exchange  were  purchasers 
of  live  stock  on  the  market,  the  members  of  the  Live  Stock 
Exchange  were  only  commission  merchants  who  sold  the  live 
stock  upon  commission  as  a  compensation  for  their  services. 

The  rules  of  the  exchange  relied  upon  by  the  government  as 


EARLY   SUPREME   COURT   DECISIONS:    1890-1901      549 

restraining  interstate  commerce  were  those  whiclTTtorbade  the 
recognition  of  any  yard  trader  unless  he  was  a  member  of  the 
exchange,  which  required  all  the  members  of  a  partnership  to 
be  members  of  the  exchange,  which  provided  that  no  member 
of  the  exchange  should  employ  any  person  to  buy  or  sell  cattle 
unless  such  person  was  a  member  of  the  exchange,  and  which 
prohibited  the  payment  of  any  fee  to  any  buyer  or  salesman  for 
buying  cattle  from  or  selling  cattle  to  such  party. 

Without  passing  upon  the  question  whether  the  members  of 
this  exchange  were  or  were  not  engaged  in  interstate  commerce, 
the  Court  held  that  the  rules  objected  to  were  of  a  character  to 
enforce  the  purpose  and  object  of  the  exchange,  and  viewed  in 
that  light  were  reasonable  and  fair.  They  could  affect  inter- 
state trade  or  commerce  in  but  a  remote  way,  and  therefore 
could  not  be  regarded  as  in  restraint  of  such  trade  or  commerce. 

The  Court  (page  615)  restated  the  rule  that  where  the  subject 
matter  of  the  agreement  does  not  directly  relate  to  and  act  upon 
and  embrace  interstate  commerce,  and  where  the  undisputed 
facts  clearly  show  that  the  purpose  of  the  agreement  was  not 
to  regulate,  obstruct,  or  restrain  that  commerce,  but  that  it  was 
entered  into  with  the  object  of  properly  and  fairly  regulating 
the  transaction  of  the  business  in  which  the  parties  to  the  agree- 
ment were  engaged,  such  agreement  would  be  upheld  as  not 
within  the  statute. 

A  few  minor  Supreme  Court  cases  under  the  Harrison,  Cleveland,  and 
McKinley  administrations  may  be  dismissed  even  more  briefly.  The 
Greenhut  proceedings  of  1892  were  directed  against  the  Whisky  Trust  but 
proved  abortive.  The  cash  register  combination  [Chapter  XVIII,  infra] 
was  indicted ;  but  the  case  was  allowed  to  lapse  "  because  of  reconciliation 
of  complaining  witness  with  defendants."  In  other  words,  the  independents 
were  merged  with  the  combination.  There  were  several  labor  decisions; 
such  as  the  Debs  cases  which  arose  out  of  the  great  railway  strike  at  Chicago  in 
1894.  Several  local  coal  dealers'  associations  were  proceeded  against.  But  ex- 
cept for  the  opinions  outlined  in  this  and  the  preceding  chapter,  they  played 
no  part  in  the  unfolding  of  a  public  policy  toward  industrial  monopoly.  —  Ed. 


XVII 

DEFINITIVE  ANTI-TRUST  LAW  INTERPRETATION 

1901-1911 

It  would  be  futile,  if  not  confusing,  even  to  outline  all  of  the  Federal 
court  decisions  which  during  a  decade  led  up  to  the  great  Standard  Oil 
opinion  of  191 1.  The  great  activity  of  the  Federal  Department  of  Justice 
under  Presidents  Roosevelt  and  Taft  has  already  been  described. ^  All  that 
need  be  done  is  to  classify  these  decisions  according  to  the  nature  of  the 
defendants.  For  however  positive  in  their  repressive  effects,  none  of  these 
judgments  contributed  to  any  real  development  of  the  law.  Even  the 
Northern  Securities  case,"-  aside  from  its  bearing  upon  the  device  of  the 
holding  company  and  upon  the  constitutional  question  of  states'  rights,  only 
disclosed  the  conflict  of  opinion  as  to  the  regulation  of  monopoly  in  the  mind 
of  the, court.  It  is  interesting,  nevertheless,  to  group  the  numerous  proceed- 
ings, even  if  they  fail  to  mark  any  real  turning  points  in  legal  construction. 

The  great  staple  monopolies  are  represented,  aside  from  the  petroleum, 
tobacco,  steel,  and  harvester  companies  herein  described  in  full,  by  repeated 
attacks  upon  the  beef  trust,  the  sugar  refining  combination  and  the  gun- 
powder monopoly.  The  first  beef  prosecutions  were  directed  against  the 
Swifts  in  1902,  followed  three  years  later  by  prosecutions  against  Armour  & 
Co.  It  was  in  the  latter  that  the  issue  really  became  one  of  procedure  in 
obtaining  evidence.  For  without  competent  witnesses,  namely  those  really 
connected  with  the  business,  little  progress  was  possible.  The  involved  mass 
of  technicalities  led  up  to  the  "immunity  bath"  decision  and  statutes,  which 
are  primarily  of  importance  to  the  specialist.^  As  for  the  sugar  trust,  its  fate 
still  hangs  in  the  balance.  The  explosives  combination  was  attacked  in  1907, 
and  four  years  later  was  ordered  dissolved  by  decree  of  the  Supreme  Court  of 
the  United  States.*  The  glucose  combination  in  the  person  of  the  Corn 
Products  Company  is  just  now  on  trial  for  its  life.  Next  in  popular  interest, 
probably,  come  the  cases  in  transportation,  already  outlined  in  chapter  XV  as 
to  railroads  ;  the  water  carriers  were  dealt  with  by  proceedings  against  agree- 
ments in  the  South  American,  Oriental  and  Alaskan  carrying  trades,  against 

1  P.  490,  supra.  2  P.  491,  supra. 

3  Details  in  Ripley,  Railroads :    Rates  and  Regulation,  p.  550. 
*An  admirable  account  of  this  combination  is  in  Quarterly  Journal  of  Economics, 
Vol.  XXVI,  1912,  pp.  444-481,  and  of  its  dissolution  in  Idem,  XXVII,  1912,  p.  202  ff. 

550 


DEFINITIVE   ANTI-TRUST   LAW    INTERPRETATION      551 

tow  boat  combinations  on  the  Great  Lakes,  and  steerage  pools  i»*t-hc  European 
service.  A  third  distinct  group  of  prosecutions  dealt  with  attempted  temporary 
corners  in  such  staples  as  coffee,  grain,  and  cotton,  exemplified  in  the  Sielcken 
valorizationcaseof  1912,  the  Patten  and  Thompson  convictions  of  191  o  and  191 3, 
and  the  Chicago  Board  of  Trade  proceedings.  Dealings  with  public  utilities  cor- 
porations are  relatively  few.  The  amicable  settlement  with  the  American  Tele- 
phone and  Telegraph  Company  in  191 4  is  a  rare  exception.  Apart  from  the  rail- 
roads, most  public  utilities  are  subject,  if  at  all,  tothecontrolof  the  several  states. 
A  large  group  of  the  anti-trust  prosecutions  during  the  decade  after  1901, 
were  directed  against  local  and  sometimes  petty  attempts  at  the  elimination  of 
competition  in  merchandising.^  Jobbers'  and  retailers'  agreements  in  the 
lumber  trade  were  perhaps  the  most  frequent,  with  coal  cases  as  a  close 
second.  Wholesale  grocers'  associations,  particularly  in  the  South ;  agree- 
ments between  dealers  in  such  necessities  as  ice,  milk  and  butter;  attempts 
by  pooling  or  otherwise  to  enhance  prices  of  fruit  and  produce,  naval  stores, 
wall  paper,  plumbing  supplies,  drugs,  and  even  charcoal  and  kindling  wood  ; 
combinations  between  jewelry  manufacturers  and  bill  posters ;  periodical 
and  newspaper  '•  insides  "  clearing  houses ;  even  such  apparently  free  busi- 
nesses as  quarrying  and  deep-sea  fishing;  all  these  have  been  haled  into 
court  with  varying  degrees  of  success  to  the  government.  Most  of  these  were 
pools  or  price  agreements  of  one  sort  or  another,  and  are  best  described  by 
reference  to  the  preceding  chapters,  (I)  dealing  with  the  early  salt  association, 
(III)  the  more  recent  wire  nail  pool,  or  (IV)  theAddystone  pipe  combination. 2 
Of  distinctively  labor  decisions,  there  were  many  ;  although  none  rivaled  the 
Debs  case  of  1894  in  importance.  Fines  were  imposed  upon  seventy-two 
Louisiana  laborers  in  1908.  Joe  Cotton  and  others  were  indicted  for  a  strike 
on  the  IlUnois  Central ;  and  an  alleged  conspiracy  among  longshoremen  was 
attacked  three  years  later.  In  1913  the  United  Mine  Workers'  and  the 
electricians'  unions  were  proceeded  against.  And  the  noteworthy  and  tragic 
conviction  of  the  hatters'  national  union  after  protracted  litigation,  in  Loewev. 
Lawlor,  with  fines  aggregating  a  quarter  of  a  million  dollars  exercised  a  great 
influence  upon  the  Federal  legislation  of  1914  amending  the  Sherman  Anti- 
Trust  law  [Chapter  XIX,  /«/;'«].  And  then,  more  rarely,  there  are  the  eflbrts 
to  control  association  in  their  own  interest  by  agriculturists,  —  the  more  nota- 
ble, perhaps,  because  of  the  agitation  for  and  subsequent  amendment  by  the 
Clayton  bill  in  1914,  exempting  farmers  from  the  Anti-Trust  law  altogether. 
The  case  of  United  States  v.  Steers  in  1910,  seeking  to  restrain  the  Ken- 
tucky "  Night  Riders  "  from  regulating  production  in  the  Burley  tobacco  fields, 
led  to  the  conviction  of,  and  imposition  of  fines  aggregating  $3500  upon,  eight 

1  Details  by  Stev^-asmQuarterly  Journal  of  Economics,  Vol.  XXVL  I9'2,  pp.  630  ff. 

2  Cf.  also  Quarterly  Journal  of  Economics,  Vol.  XXVI,  1912,  pp.  593-643,  and 
American  Economic  Review,  191 3,  pp.  549~575' 


552  TRUSTS,    POOLS   AND   CORPORATIONS 

of  the  ring  leaders.  The  prosecution  of  the  butter  and  egg  combinations  of 
Chicago  and  Elgin.  Illinois,  in  1912-1914  belongs  rather  in  the  category  of 
merchandising  than  of  agricultural  production. 

Two  other  distinct  groups  of  cases  deal,  respectively,  with  abuse  of  the  privi- 
lege of  Federal  licenses  —  the  so-called  patent  pools  —  and  with  vicious  trade 
practices,  as  such,  irrespective  of  the  nature  of  the  combination.  These  will 
be  exemplified  concretely  in  the  decisions  reported  in  the  next  chapter,  which 
were  framed  upon  the  basis  of  the  construction  according  to  the  law  of  reason 
in  the  Standard  Oil  decision.  There  were  many  of  each  of  these  during  the 
decade  to  191 1  under  review;  but  they  in  no  instance  attained  prominence 
because  of  any  advance  in  the  interpretation  of  the  anti-monopoly  law.^ 
This  distinction  was  reserved  for  the  two  leading  opinions  reprinted  in  this 
chapter.  They  mark  a  sharp  turning  point  in  construction,-  the  entire  con- 
viction at  last  of  the  mind  of  the  Supreme  Court  of  the  United  States,  that  all 
was  not  well  with  business  as  it  had  come  to  be  conducted  in  America,  but 
that,  nevertheless,  the  time  had  arrived  to  discriminate  between  what  was  evil, 
deserving  elimination,  and  that  which  was  so  inherently  sound  and  necessary 
as  to  merit  the  protection,  nay  even  the  encouragement,  of  the  law.  The 
legal  basis  for  this  distinction  is  outlined  in  the  following  opinions.  — Ed. 

THE   STANDARD    OIL   DECISION  s 

Mr.  Chief  Justice  White  delivered  the  opinion  of  the  court. 

The  conspiracy  was  alleged  to  have  been  formed  in  or  about 
the  year  1870  by  three  of  the  individual  defendants,  viz. :  John  D. 
Rockefeller,  William  Rockefeller,  and  Henry  M.  Flagler.  The 
detailed  averments  concerning  the  alleged  conspiracy  were  ar- 

^  Possible  exception  may  be  made  of  Montague  Ss'  Conpanyv.  Lowry.  (193 
U.  S.  Rep.  38.  Decided  February  23,  1904.)  An  association  was  formed  in  Cali- 
fornia by  manufacturers  of  and  dealers  in  tiles,  mantels,  and  grates;  the  dealers 
agreed  not  to  purchase  materials  from  manufacturers  who  were  not  members,  and 
not  to  sell  unset  tiles  for  less  than  Hst  prices,  which  were  50  per  cent  higher  than  to 
members.  Manufacturers,  resident  in  other  states  than  California,  agreed  not  to  sell 
to  any  other  than  members.  Membership  was  prescribed  by  rules,  such  as  carrying 
^3000  worth  of  stock.  A  firm  of  outside  dealers  who  were  not  members,  and  who 
did  not  carry  $3000  worth  of  stock,  brought  action  under  §  7  of  the  Anti-Trust  Act 
of  1890.  It  was  held,  that  although  sales  within  the  state  were  but  a  small  part  of 
the  total  transactions  involved,  the  general  effect  of  the  scheme  was  to  enhance 
prices ;  and  that  it  was  impossible  to  separate  intrastate  from  interstate  business  ; 
and  that  a  combination  in  restraint  of  trade  had  been  shown.  The  parties  aggrieved 
were  entitled  to  recover  threefold  damages  as  found  by  the  jury. 

■^  On  this  point  cf.  Journal  of  Political  Economy,  Vol.  XXIII,  1915,  pp.  204  ff. 

3  Standard  Oil  Co.  v.  United  States,  31  Supreme  Court  Reporter,  502  ;  221  U.  S.  i. 
Decided  May  15,  191 1.     Many  extended  legal  citations  are  stricken  out  for  purposes 


DEFINITIVE   ANTI-TRUST   LAW    INTERPRETATION     553 

ranged  with  reference  to  three  periods,  the  first  frtnn  1870  to 
1882,  the  second  from  1882  to  1899,  and  the  third  from  1899  to 
the  time  of  the  fihng  of  the  bill. 

The  general  charge  concerning  the  period  from  1870  to  1882 
was  as  follows : 

That  during  said  first  period  the  said  individual  defendants,  in 
connection  with  the  Standard  Oil  Company  of  Ohio,  purchased  and 
obtained  interests  through  stock  ownership  and  otherwise  in,  and  en- 
tered into  agreements  with,  various  persons,  firms,  corporations,  and 
limited  partnerships  engaged  in  purchasing,  shipping,  refining,  and 
selling  petroleum  and  its  products  among  the  various  states,  for  the 
purpose  of  fixing  the  price  of  crude  and  refined  oil  and  the  products 
thereof,  limiting  the  production  thereof,  and  controlling  the  transporta- 
tion therein,  and  thereby  restraining  trade  and  commerce  among  the 
several  states,  and  monopolizing  the  said  commerce. 

To  establish  this  charge  it  was  averred  that  John  D.  and 
William  Rockefeller  and  several  other  named  individuals,  who, 
prior  to  1870,  composed  three  separate  partnerships  engaged  in 
the  business  of  refining  crude  oil  and  shipping  its  products  in 
interstate  commerce,  organized  in  the  year  1870  a  corporation 
known  as  the  Standard  Oil  Company  of  Ohio,  and  transferred 
to  that  company  the  business  of  the  said  partnerships,  the  mem- 
bers thereof  becoming,  in  proportion  to  their  prior  ownership, 
stockholders  in  the  corporation.  It  was  averred  that  the  other 
individual  defendants  soon  afterwards  became  participants  in 
the  illegal  combination,  and  either  transferred  property  to  the 
corporation  or  to  individuals,  to  be  held  for  the  benefit  of  all 
parties  in  interest  in  proportion  to  their  respective  interests  in 
the  combination ;  that  is,  in  proportion  to  their  stock  ownership 
in  the  Standard  Oil  Company  of  Ohio.  By  the  means  thus 
stated,  it  was  charged  that  by  the  year  1872,  the  combination 
had  acquired  substantially  all  but  three  or  four  of  the  thirty-five 
or  forty  oil  refineries  located  in  Cleveland,  Ohio.  By  reason  of 
the  power  thus  obtained,  and  in  further  execution  of  the  intent 

of  condensation,  where  merely  cross  references,  often  without  specific  indication. 
This  is  a  compilation  for  economists,  not  for  lawyers.  An  excellent  commentary  by 
Professor  Seager  will  be  found  in  Political  Science  Quarterly,  Vol.  XXVI,  1911, 
pp.  581-614. 


554  TRUSTS,    POOLS   AND    CORPORATIONS 

and  purpose  to  restrain  trade  and  to  monopolize  the  commerce, 
interstate  as  well  as  intrastate,  in  petroleum  and  its  products,  the 
bill  alleged  that  the  combination  and  its  members  obtained  large 
preferential  rates  and  rebates  in  many  and  devious  ways  over 
their  competitors  from  various  railroad  companies,  and  that  by 
means  of  the  advantage  thus  obtained  many,  if  not  virtually  all, 
competitors  were  forced  either  to  become  members  of  the  com- 
bination or  were  driven  out  of  business  ;  and  thus,  it  was  alleged, 
during  the  period  in  question,  the  following  results  were  brought 
about :  (a)  That  the  combination,  in  addition  to  the  refineries  in 
Cleveland  which  it  had  acquired,  as  previously  stated,  and  which 
it  had  either  dismantled  to  limit  production,  or  continued  to 
operate,  also  from  time  to  time  acquired  a  large  number  of  re- 
fineries of  crude  petroleum,  situated  in  New  York,  Pennsylvania, 
Ohio,  and  elsewhere.  The  properties  thus  acquired,  like  those 
previously  obtained,  although  belonging  to  and  being  held  for 
the  benefit  of  the  combination,  were  ostensibly  divergently  con- 
trolled, some  of  them  being  put  in  the  name  of  the  Standard  Oil 
Company  of  Ohio,  some  in  the  name  of  corporations  or  limited 
partnerships  affiliated  therewith,  or  some  being  left  in  the  name 
of  the  original  owners,  who  had  become  stockholders  in  the 
Standard  Oil  Company  of  Ohio,  and  thus  members  of  the  alleged 
illegal  combination,  (l^)  That  the  combination  had  obtained 
control  of  the  pipe  lines  available  for  transporting  oil  from  the 
oil  fields  to  the  refineries  in  Cleveland,  Pittsburg,  Titusville, 
Philadelphia,  New  York,  and  New  Jersey,  (c)  That  the  com- 
bination during  the  period  named  had  obtained  a  complete 
mastery  over  the  oil  industry,  controlling  90  per  cent  of  the 
business  of  producing,  shipping,  refining,  and  selling  petroleum 
and  its  products,  and  thus  was  able  to  fix  the  price  of  crude  and 
refined  petroleum,  and  to  restrain  and  monopolize  all  interstate 
commerce  in  those  products. 

The  averments  bearing  upon  the  second  period  (1882  to  1899) 
had  relation  to  the  claim  : 

That  during  the  said  second  period  of  conspiracy  the  defendants 
entered  into  a  contract  and  trust  agreement,  by  which  various  in- 
dependent firms,  corporations,  limited  partnerships,  and  individuals 
engaged  in  purchasing,  transporting,  refining,  shipping,  and  selling 


DEFINITIVE   ANTI-TRUST    LAW    INTERPRETATION      555 

oil  and  the  products  thereof  among  the  various  states,  tuuied  over  the 
management  of  their  said  business,  corporations,  and  limited  partner- 
ships to  nine  trustees,  composed  chiefly  of  certain  individuals  defendant 
herein,  which  said  trust  agreement  was  in  restraint  of  trade  and  com- 
merce, and  in  violation  of  law,  as  hereinafter  more  particularly  alleged. 

The  trust  agreement  thus  referred  to  was  set  out  in  the  bill. 
It  was  made  in  January,  1882.  By  its  terms  the  stock  of  forty 
corporations,  including  the  Standard  Oil  Company  of  Ohio,  and 
a  large  quantity  of  various  properties  which  had  been  previously 
acquired  by  the  alleged  combination,  and  which  was  held  in  di- 
verse forms,  as  we  have  previously  indicated,  for  the  benefit  of 
the  members  of  the  combination,  was  vested  in  the  trustees  and 
their  successors,  "to  be  held  for  all  parties  in  interest  jointly." 
In  the  body  of  the  trust  agreement  was  contained  a  list  of  the 
various  individuals  and  corporations  and  limited  partnerships 
whose  stockholders  and  members,  or  a  portion  thereof,  became 
parties  to  the  agreement.     This  list  is  in  the  margin.      [Omitted.] 

The  agreement  made  provision  for  the  method  of  controlling 
and  managing  the  property  by  the  trustees,  for  the  formation  of 
additional  manufacturing,  etc.,  corporations  in  various  states,  and 
the  trust,  unless  terminated  by  a  mode  specified,  was  to  continue 
"during  the  lives  of  the  survivors  and  survivor  of  the  trustees 
named  in  the  agreement  and  for  twenty-one  years  thereafter." 
The  agreement  provided  for  the  issue  of  Standard  Oil  Trust  cer- 
tificates to  represent  the  interest  arising  under  the  trust  in  the 
properties  affected  by  the  trust,  which,  of  course,  in  view  of  the 
provisions  of  the  agreement  and  the  subject  to  which  it  related 
caused  the  interest  in  the  certificates  to  be  coincident  with  and 
the  exact  representative  of  the  interest  in  the  combination,  that  is, 
in  the  Standard  Oil  Company  of  Ohio.  Soon  afterwards  it  was 
alleged  the  trustees  organized  the  Standard  Oil  Company  of  New 
Jersey  and  the  Standard  Oil  Company  of  New  York,  the  former 
having  a  capital  stock  of  $3,000,000  and  the  latter  a  capital 
stock  of  $5,000,000,  subsequently  increased  to  $10,000,000,  and 
$15,000,000,  respectively.  The  bill  alleged  "that  pursuant  to 
said  trust  agreement  the  said  trustees  caused  to  be  transferred 
to  themselves  the  stocks  of  all  corporations  and  limited  partner- 
ships named  in  said  trust  agreement,  and  caused  various  of  the 


556  TRUSTS,    POOLS   AND  CORPORATIONS 

individuals  and  copartnerships  who  owned  apparently  independent 
refineries  and  other  properties  employed  in  the  business  of  re- 
fining and  transporting  and  selling  oil  in  and  among  said  various 
states  and  territories  of  the  United  States,  as  aforesaid,  to  trans- 
fer their  property  situated  in  said  several  states  to  the  respective 
Standard  Oil  Companies  of  said  States  of  New  York,  New  Jersey, 
Pennsylvania,  and  Ohio,  and  other  corporations  organized  or 
acquired  by  said  trustees  from  time  to  time.  .  .  ."  For  the 
stocks  and  property  so  acquired  the  trustees  issued  trust  certifi- 
cates. It  was  alleged  that  in  1888  the  trustees  "  unlawfully  con- 
trolled the  stock  and  ownership  of  various  corporations  and 
limited  partnerships  engaged  in  such  purchase  and  transporta- 
tion, refining,  selling,  and  shipping  of  oil,"  as  per  a  list  which  is 
excerpted  in  the  margin.      [List  omitted.] 

The  bill  charged  that  during  the  second  period  quo  warranto 
proceedings  were  commenced  against  the  Standard  Oil  Company 
of  Ohio,  which  resulted  in  the  entry  by  the  supreme  court  of 
Ohio,  on  March  2,  1892,  of  a  decree  adjudging  the  trust  agree- 
ment to  be  void,  not  only  because  the  Standard  Oil  Company  of 
Ohio  was  a  party  to  the  same,  but  also  because  the  agreement 
in  and  of  itself  was  in  restraint  of  trade  and  amounted  to  the 
creation  of  an  unlawful  monopoly.  It  was  alleged  that  shortly 
after  this  decision,  seemingly  for  the  purpose  of  complying 
therewith,  voluntary  proceedings  were  had  apparently  to  dis- 
solve the  trust,  but  that  these  proceedings  were  a  subterfuge 
and  a  sham  because  they  simply  amounted  to  a  transfer  of  the 
stock  held  by  the  trust  in  sixty-four  of  the  companies  which  it 
controlled  to  some  of  the  remaining  twenty  companies,  it  having 
controlled  before  the  decree  eighty-four  in  all,  thereby,  while 
seemingly  in  part  giving  up  its  dominion,  yet  in  reality  preserv- 
ing the  same  by  means  of  the  control  of  the  companies  as  to 
which  it  had  retained  complete  authority.  It  was  charged  that 
especially  was  this  the  case,  as  the  stock  in  the  companies 
selected  for  transfer  was  virtually  owned  by  the  nine  trustees  or 
the  members  of  their  immediate  families  or  associates.  The 
bill  further  alleged  that  in  1897  the  attorney-general  of  Ohio 
instituted  contempt  proceedings  in  the  quo  warranto  case,  based 
upon  the  claim  that  the  trust  had  not  been  dissolved  as  required 


DEFINITIVE   ANTI-TRUST    LAW    INTERPRl-rrAI'ION      557 

by  the  decree  in  that  case.  About  the  same  time,  al^gt,  proceed- 
ings in  quo  warranto  were  commenced  to  forfeit  the  charter  of 
a  pipe  line  known  as  the  Buckeye  Pipe  Line  Company,  an  Ohio 
corporation,  whose  stock,  it  was  alleged,  was  owned  by  the  mem- 
bers of  the  combination,  on  the  ground  of  its  connection  with 
the  trust  which  had  been  held  to  be  illegal. 

The  result  of  these  proceedings,  the  bill  charged,  caused  a 
resort  to  the  alleged  wrongful  acts  asserted  to  have  been  com- 
mitted during  the  third  period,  as  follows : 

That  during  the  third  period  of  said  conspiracy,  and  in  pursuance 
thereof,  the  said  individual  defendants  operated  through  the  Standard 
Oil  Company  of  New  Jersey,  as  a  holding  corporation,  which  corpora- 
tion obtained  and  acquired  the  majority  of  the  stocks  of  the  various 
corporations  engaged  in  purchasing,  transporting,  refining,  shipping, 
and  selling  oil  into  and  among  the  various  states  and  territories  of  the 
United  States  and  the  District  of  Columbia  and  with  foreign  nations, 
and  thereby  managed  and  controlled  the  same,  in  violation  of  the  laws 
of  the  United  States,  as  hereinafter  more  particularly  alleged. 

It  was  alleged  that  in  or  about  the  month  of  January,  1899, 
the  individual  defendants  caused  the  charter  of  the  Standard  Oil 
Company  of  New  Jersey  to  be  amended,  "  so  that  the  business 
and  objects  of  said  company  were  stated  as  follows,  to  wit :  '  To 
do  all  kinds  of  mining,  manufacturing,  and  trading  business ; 
transporting  goods  and  merchandise  by  land  or  water  in  any 
manner ;  to  buy,  sell,  lease,  and  improve  land ;  build  houses, 
structures,  vessels,  cars,  wharves,  docks,  and  piers ;  to  lay  and 
operate  pipe  lines;  to  erect  lines  for  conducting  electricity;  to 
enter  into  and  carry  out  contracts  of  every  kind  pertaining  to 
its  business  ;  to  acquire,  use,  sell,  and  grant  licenses  under  patent 
rights ;  to  purchase  or  otherwise  acquire,  hold,  sell,  assign,  and 
transfer  shares  of  capital  stock  and  bonds  or  other  evidences  of 
indebtedness  of  corporations,  and  to  exercise  all  the  privileges 
of  ownership,  including  voting  upon  the  stock  so  held ;  to  carry 
on  its  business  and  have  offices  and  agencies  therefor  in  all  parts 
of  the  world,  and  to  hold,  purchase,  mortgage,  and  convey  real 
estate  and  personal  property  outside  the  state  of  New  Jersey.' " 

The  capital  stock  of  the  company  —  which,  since  March  19, 


558  TRUSTS,    POOLS   AND    CORPORATIONS 

1892,  had  been  $10,000,000  —  was  increased  to  $110,000,000; 
and  the  individual  defendants,  as  therefore,  continued  to  be  a 
majority  of  the  board  of  directors. 

Without  going  into  detail  it  suffices  to  say  that  it  was  alleged 
in  the  bill  that  shortly  after  these  proceedings  the  trust  came  to 
an  end,  the  stock  of  the  various  corporations  which  had  been 
controlled  by  it  being  transferred  by  its  holders  to  the  Standard 
Oil  Company  of  New  Jersey,  which  corporation  issued  therefor 
certificates  of  its  common  stock  to  the  amount  of  $97,250,000. 
The  bill  contained  allegations  referring  to  the  development  of 
new  oil  fields ;  for  example,  in  California,  southeastern  Kansas, 
northern  Indian  territory,  and  northern  Oklahoma,  and  made 
reference  to  the  building  or  otherwise  acquiring  by  the  combina- 
tion of  refineries  and  pipe  lines  in  the  new  fields  for  the  purpose 
of  restraining  and  monopolizing  the  interstate  trade  in  petroleum 
and  its  products. 

Reiterating  in  substance  the  averments  that  both  the  Standard 
Oil  Trust  from  1882  to  1899,  and  the  Standard  Oil  Company  of 
New  Jersey,  since  1899,  had  monopolized  and  restrained  inter- 
state commerce  in  petroleum  and  its  products,  the  bill  at  great 
length  additionally  set  forth  various  means  by  which,  during  the 
second  and  third  periods,  in  addition  to  the  effect  occasioned  by 
the  combination  of  alleged  previously  independent  concerns, 
the  monopoly  and  restraint  complained  of  were  continued. 
Without  attempting  to  follow  the  elaborate  averments  on  these 
subjects,  spread  over  fifty-seven  pages  of  the  printed  record,  it 
suffices  to  say  that  such  averments  may  properly  be  grouped 
under  the  following  heads :  Rebates,  preferences,  and  other 
discriminatory  practices  in  favor  of  the  combination  by  railroad 
companies ;  restraint  and  monopolization  by  control  of  pipe 
lines,  and  unfair  practices  against  competing  pipe  lines ;  con- 
tracts with  competitors  in  restraint  of  trade ;  unfair  methods  of 
competition,  such  as  local  price  cutting  at  the  points  where  nec- 
essary to  suppress  competition ;  espionage  of  the  business  of 
competitors,  the  operation  of  bogus  independent  companies,  and 
payment  of  rebates  on  oil,  with  the  like  intent ;  the  division  of 
the  United  States  into  districts,  and  the  limiting  the  operations 
of  the  various  subsidiary  corporations  as  to  such  districts  so  that 


DEFINITIVE   ANTI-TRUST   LAW   INTERPRETATION     559 

competition  in  the  sale  of  petroleum  products  between  such  cor- 
porations had  been  entirely  eliminated  and  destroyed  ;  and  finally 
reference  was  made  to  what  was  alleged  to  be  the  "  enormous 
and  unreasonable  profits  "  earned  by  the  Standard  Oil  Trust  and 
the  Standard  Oil  Company  as  a  result  of  the  alleged  monopoly ; 
which  presumably  was  averred  as  a  means  of  reflexly  inferring 
the  scope  and  power  acquired  by  the  alleged  combination. 


Coming  to  the  prayer  of  the  bill,  it  suffices  to  say  that  in 
general  terms  the  substantial  relief  asked  was,  first,  that  the 
combination  in  restraint  of  interstate  trade  and  commerce,  and 
which  had  monopolized  the  same,  as  alleged  in  the  bill,  be  found 
to  have  existence,  and  that  the  parties  thereto  be  perpetually 
enjoined  from  doing  any  further  act  to  give  effect  to  it ;  second, 
that  the  transfer  of  the  stocks  of  the  various  corporations  to  the 
Standard  Oil  Company  of  New  Jersey,  as  alleged  in  the  bill,  be 
held  to  be  in  violation  of  the  ist  and  2d  sections  of  the  anti-trust 
act,  and  that  the  Standard  Oil  Company  of  New  Jersey  be  en- 
joined and  restrained  from  in  any  manner  continuing  to  exert 
control  over  the  subsidiary  corporations  by  means  of  ownership 
of  said  stock  or  otherwise  ;  third,  that  specific  relief  by  injunc- 
tion be  awarded  against  further  violation  of  the  statute  by  any 
of  the  acts  specifically  complained  of  in  the  bill.  There  was 
also  a  prayer  for  general  relief. 

^  ^  ^  y^  ^  -f^  ^ 

Duly  appreciating  the  situation  just  stated  [directly  opposing 
contentions  of  counsel],  it  is  certain  that  only  one  point  of  concord 
between  the  parties  is  discernible,  which  is,  that  the  controversy 
in  every  aspect  is  controlled  by  a  correct  conception  of  the  mean- 
ing of  the  1st  and  2d  sections  of  the  anti-trust  act.  We  shall 
therefor  —  departing  from  what  otherwise  would  be  the  natural 
order  of  analysis  —  make  this  one  point  of  harmony  the  initial 
basis  of  our  examination  of  the  contentions,  relying  upon  the 
conception  that  by  doing  so  some  harmonious  resonance  may 
result  adequate  to  dominate  and  control  the  discord  with  which 
the  case  abounds.  That  is  to  say,  we  shall  first  come  to  consider 
the  meaning  of  the  ist  and  2d  sections  of  the  anti-trust  act  by 


56o  TRUSTS,    POOLS   AND   CORPORATIONS 

the  text,  and  after  discerning  what  by  that  process  appears  to  be 
its  true  meaning,  we  shall  proceed  to  consider  the  respective 
contentions  of  the  parties  concerning  the  act,  the  strength  or 
weakness  of  those  contentions,  as  well  as  the  accuracy  of  the 
meaning  of  the  act  as  deduced  from  the  text  in  the  light  of  the 
prior  decisions  of  this  court  concerning  it.  When  we  have  done 
this,  we  shall  then  approach  the  facts.  Following  this  course, 
we  shall  make  our  investigation  under  four  separate  headings : 
First.  The  text  of  the  ist  and  2d  sections  of  the  act,  originally 
considered,  and  its  meaning  in  the  light  of  the  common  law  and 
the  law  of  this  country  at  the  time  of  its  adoption.  Second. 
[P.  571,  infra.']  The  contentions  of  the  parties  concerning  the 
act,  and  the  scope  and  effect  of  the  decisions  of  this  court  upon 
which  they  rely.  Third.  [P.  577,  infra.]  The  appHcation  of 
the  statute  to  facts  :  and.  Fourth.  [P.  581,  infra.]  The  remedy, 
if  any,  to  be  afforded  as  the  result  of  such  application. 

First.      The  text  of  the  act  and  its  meaning. 

We  quote  the  text  of  the  ist  and  2d  sections  of  the  act,  as 
follows  :    [On  p.  484,  supra.] 

The  debates  show  that  doubt  as  to  whether  there  was  a  com- 
mon law  of  the  United  States  which  governed  the  subject  in  the 
absence  of  legislation  was  among  the  influences  leading  to  the 
passage  of  the  act.  They  conclusively  show,  however,  that  the 
main  cause  which  led  to  the  legislation  was  the  thought  that  it 
was  required  by  the  economic  condition  of  the  times  ;  that  is,  the 
vast  accumulation  of  wealth  in  the  hands  of  corporations  and 
individuals,  the  enormous  development  of  corporate  organization, 
the  facility  for  combination  which  such  organizations  afforded, 
the  fact  that  the  facility  was  being  used,  and  that  combinations 
known  as  trusts  were  being  multiplied,  and  the  widespread  im- 
pression that  their  power  had  been  and  would  be  exerted  to 
oppress  individuals  and  injure  the  public  generally.  Although 
debates  may  not  be  used  as  a  means  for  interpreting  a  statute, 
that  rule,  in  the  nature  of  things,  is  not  violated  by  resorting  to 
debates  as  a  means  of  ascertaining  the  environment  at  the  time 
of  the  enactment  of  a  particular  law  ;  that  is,  the  history  of  the 
period  when  it  was  adopted. 

There  can  be  no  doubt  that  the  sole  subject  with  which  the  ist 


DEFINITIVE   ANTI-TRUST    LAW    IN'HCRPRF/IA'IION     561 

section  deals  is  restraint  of  trade  as  therein  contcmplatedrand  that 
the  attempt  to  monopolize  and  monopolization  is  the  subject  with 
which  the  2d  section  is  concerned.  It  is  certain  that  those  terms, 
at  least  in  their  rudimentary  meaning,  took  their  origin  in  the 
common  law,  and  were  also  familiar  in  the  law  of  this  country 
prior  to  and  at  the  time  of  the  adoption  of  the  act  in  question. 

We  shall  endeavor  then,  first,  to  seek  their  meaning,  not  by 
indulging  in  an  elaborate  and  learned  analysis  of  the  English 
law  and  of  the  law  of  this  country,  but  by  making  a  very  brief 
reference  to  the  elementary  and  indisputable  conceptions  of  both 
the  English  and  American  law  on  the  subject  prior  to  the  pas- 
sage of  the  anti-trust  act. 

a.  It  is  certain  that  at  a  very  remote  period  the  words  "  con- 
tract in  restraint  of  trade  "  in  England  came  to  refer  to  some 
voluntary  restraint  put  by  contract  by  an  individual  on  his  right 
to  carry  on  his  trade  or  calling.  Originally  all  such  contracts 
were  considered  to  be  illegal,  because  it  was  deemed  they  were 
injurious  to  the  public  as  well  as  to  the  individuals  who  made 
them.  In  the  interest  of  the  freedom  of  individuals  to  contract, 
this  doctrine  was  modified  so  that  it  was  only  when  a  restraint 
by  contract  was  so  general  as  to  be  coterminous  with  the  kingdom 
that  it  was  treated  as  void.  That  is  to  say,  if  the  restraint  was 
partial  in  its  operation,  and  was  otherwise  reasonable,  the  con- 
tract was  held  to  be  valid  : 

b.  Monopolies  were  defined  by  Lord  Coke  as  follows : 

A  monopoly  is  an  institution  or  allowance  by  the  King  by  his 
grant,  commission,  or  otherwise,  to  any  person  or  persons,  bodies 
politic  or  corporate,  of  or  for  the  sole  buying,  selling,  making,  working, 
or  using  of  anything,  whereby  any  person  or  persons,  bodies  politic  or 
corporate,  are  sought  to  be  restrained  of  any  freedom  or  liberty  that 
they  had  before,  or  hindered  in  their  lawful  trade.     (3  Inst.  181.) 

Hawkins  thus  defined  them  : 

A  monopoly  is  an  allowance  by  the  King  to  a  particular  person  or 
persons  of  the  sole  buying,  selling,  making,  working,  or  using  of  any- 
thing whereby  any  person  is  sought  to  be  restrained  from  any  freedom 
[of  manufacturing  or  trading]  which  he  had  before.  (Hawk.  P.  C. 
bk.  I,  chap.  79.) 


562  TRUSTS,    POOLS  AND   CORPORATIONS 

The  frequent  granting  of  monopolies  and  the  struggle  which 
led  to  a  denial  of  the  power  to  create  them,  that  is  to  say,  to  the 
establishment  that  they  were  incompatible  with  the  English 
Constitution,  is  known  to  all  and  need  not  be  reviewed.^  The 
evils  which  led  to  the  public  outcry  against  monopolies  and  to 
the  final  denial  of  the  power  to  make  them  may  be  thus  sum- 
marily stated:  (i)  The  power  which  the  monopoly  gave  to  the 
one  who  enjoyed  it,  to  fix  the  price  and  thereby  injure  the  public ; 
(2)  The  power  which  it  engendered  of  enabling  a  limitation  on 
production;  and  (3)  The  danger  of  deterioration  in  quality  of 
the  monopolized  article  which  it  was  deemed  was  the  inevitable 
resultant  of  the  monopoHstic  control  over  its  production  and 
sale.  As  monopoly,  as  thus  conceived,  embraced  only  a  con- 
sequence arising  from  an  exertion  of  sovereign  power,  no  ex- 
press restrictions  or  prohibitions  obtained  against  the  creation 
by  an  individual  of  a  monopoly  as  such.  But  as  it  was  con- 
sidered, at  least,  so  far  as  the  necessaries  of  life  were  concerned, 
that  individuals,  by  the  abuse  of  their  right  to  contract,  might 
be  able  to  usurp  the  power  arbitrarily  to  enhance  prices  (one  of 
the  wrongs  arising  from  monopoly),  it  came  to  be  that  laws  were 
passed  relating  to  offenses  such  as  forestalling,  regrating,  and 
engrossing  by  which  prohibitions  were  placed  upon  the  power 
of  individuals  to  deal  under  such  circumstances  and  conditions 
as,  according  to  the  conception  of  the  times,  created  a  presump- 
tion that  the  dealings  were  not  simply  the  honest  exertion  of 
one's  right  to  contract  for  his  own  benefit,  unaccompanied  by  a 
wrongful  motive  to  injure  others,  but  were  the  consequence  of  a 
contract  or  course  of  dealing  of  such  a  character  as  to  give  rise 
to  the  presumption  of  an  intent  to  injure  others  through  the 
means,  for  instance,  of  a  monopolistic  increase  of  prices.  This 
is' illustrated  by  the  definition  of  engrossing  found  in  the  statue, 
5  and  6  Edw,  VI.,  chap.  14,  as  follows: 

Whatsoever  person  or  persons  .  .  .  shall  engross  or  get  into  his  or 
their  hands  by  buying,  contracting,  or  promise-taking,  other  than  by 
demise,  grant,  or  lease  of  land,  or  tithe,  any  corn  growing  in  the  fields, 
or  any  other  corn  or  grain,  butter,  cheese,  fish,  or  other  dead  victuals 

'^  Cf.  W.  H.  Price's  admirable  English  Patents  of  Monopoly,  Harvard  Economic 
Studies^  1906.  —  Ed. 


DEFINITIVE   ANTI-TRUST   LAW    INTERPRETATION     563 

whatsoever,  within  the  realm  of  England,  to  the  intenttO  sell  the 
same  again,  shall  be  accepted,  reputed,  and  taken  an  unlawful  en- 
grosser or  engrossers. 

As  by  the  statues  providing  against  engrossing  the  quantity 
engrossed  was  not  required  to  be  the  whole  or  a  proximate  part 
of  the  whole  of  an  article,  it  is  clear  that  there  was  a  wide  dif- 
ference between  monopoly  and  engrossing,  etc.  But  as  the 
principal  wrong  which  it  was  deemed  would  result  from  mo- 
nopoly, that  is,  an  enhancement  of  the  price,  was  the  same 
wrong  to  which  it  was  thought  the  prohibited  engrossment 
would  give  rise,  it  came  to  pass  that  monopoly  and  engrossing 
were  regarded  as  virtually  one  and  the  same  thing.  In  other 
words,  the  prohibited  act  of  engrossing,  because  of  its  inevitable 
accomplishment  of  one  of  the  evils  deemed  to  be  engendered  by 
monopoly,  came  to  be  referred  to  as  being  a  monopoly  or  con- 
stituting an  attempt  to  monopolize.  Thus  Pollexfen,  in  his 
argument  in  East  India  Co.  v.  Sajidys,  Skinner,  165,  169,  said: 

By  common  law,  he  said  that  trade  is  free,  and  for  that  cited  3 
Co.  Inst.  181  ;  ¥.  B.  65  ;  Taylors  de  Ipsrvich  v.  Sherring,  i  Rolle, 
Rep.  4 ;  that  the  common  law  is  as  much  against  monopoly  as  en- 
grossing ;  and  that  they  diflfer  only  that  a  monopoly  is  by  patent  from 
the  King,  the  other  is  by  the  act  of  the  subject  between  party  and 
party;  but  that  the  mischiefs  are  the  same  from  both,  and  there  is  the 
same  law  against  both.  Darcy  v.  Allen,  F.  Moore,  673,  11  Coke,  84. 
The  sole  trade  of  anything  is  engrossing  ex  rei  natura,  from  whosoever 
hath  the  sale  trade  of  buying  and  selling  hath  engrossed  that  trade ; 
and  whosoever  hath  the  sole  trade  to  any  country  hath  the  sole  trade 
of  buying  and  selling  the  product  of  that  country,  at  his  own  price, 
which  is  an  engrossing. 

And  by  operation  of  the  mental  process  which  led  to  consid- 
ering as  a  monopoly  acts  which,  although  they  did  not  con- 
stitute a  monopoly,  were  thought  to  produce  some  of  its  baneful 
effects,  so  also  because  of  the  impediment  or  burden  to  the  due 
course  of  trade  which  they  produced,  such  acts  came  to  be 
referred  to  as  in  restraint  of  trade.  This  is  shown  by  my  Lord 
Coke's  definition  of  monopoly  as  being  "an  institution  or  allow- 
ance .  .  .  whereby  any  person  or  persons,  bodies  politic  or 
corporate,  are  sought  to  be  restrained  of  any  freedom  or  liberty 


564  TRUSTS,    POOLS   AND    CORPORATIONS 

that  they  had  before,  or  hindered  in  their  lawful  trade."  It  is 
illustrated  also  by  the  definition  which  Hawkins  gives  of  mo- 
nopoly wherein  it  is  said  that  the  effect  of  monopoly  is  to 
restrain  the  citizen  "from  the  freedom  of  manufacturing  or 
trading  which  he  had  before."  And  see  especially  the  opinion 
of  Parker,  C.  J.,  in  Mitchel  v.  Reynolds  (171 1),  i  P.  Ws.  181 
where  a  classification  is  made  of  monopoly  which  brings  it 
generically  within  the  description  of  restraint  of  trade. 

Generalizing  these  considerations,  the  situation  is  this  :  i.  That 
by  the  common  law,  monopolies  were  unlawful  because  of  their 
restriction  upon  individual  freedom  of  contract  and  their  injury 
to  the  public.  2.  That  as  to  necessaries  of  life,  the  freedom 
of  the  individual  to  deal  was  restricted  where  the  nature  and 
character  of  the  dealing  was  such  as  to  engender  the  presump- 
tion of  intent  to  bring  about  at  least  one  of  the  injuries  which 
it  was  deemed  would  result  from  monopoly,  —  that  is,  an  undue 
enhancement  of  price.  3.  That  to  protect  the  freedom  of  con- 
tract of  the  individual,  not  only  in  his  own  interest,  but  princi- 
pally in  the  interest  of  the  common  weal,  a  contract  of  an 
individual  by  which  he  put  an  unreasonable  restraint  upon  him- 
self as  to  carrying  on  his  trade  or  business  was  void.  And  that 
at  common  law  the  evils  consequent  upon  engrossing,  etc., 
caused  those  things  to  be  treated  as  coming  within  monopoly 
and  sometimes  to  be  called  monopoly,  and  the  same  considera- 
tions caused  monopoly,  because  of  its  operation  and  effect,  to  be 
brought  within  and  spoken  of  generally  as  impeding  the  due 
course  of,  or  being  in  restraint  of,  trade. 

From  the  development  of  more  accurate  economic  concep- 
tions and  the  changes  in  conditions  of  society,  it  came  to  be 
recognized  that  the  acts  prohibited  by  the  engrossing,  forestall- 
ing, etc.,  statutes  did  not  have  the  harmful  tendency  which  they 
were  presumed  to  have  when  the  legislation  concerning  them 
was  enacted,  and  therefore  did  not  justify  the  presumption 
which  had  previously  been  deduced  from  them,  but,  on  the  con- 
trary, such  acts  tended  to  fructify  and  develop  trade.  See  the 
statutes  of  12th  George  III,  chap.  71,  enacted  in  1772,  and  stat- 
ute of  7  and  8  Victoria,  chap.  24,  enacted  in  1844,  repeahng 
the  prohibitions  against  engrossing,  forestalling,  etc.,  upon  the 


DEFINITIVE   ANTI-TRUST    LAW    INTERPRETATION     565 

express  ground  that  the  prohibited  acts  had  come  t^Jjc  consid- 
ered as  favorable  to  the  development  of,  and  not  in  restraint  of, 
trade.  It  is  remarkable  that  nowhere  at  common  law  can  there 
be  found  a  prohibition  against  the  creation  of  monopoly  by  an 
individual.  This  would  seem  to  manifest,  either  consciously  or 
intuitively,  a  profound  conception  as  to  the  inevitable  operation 
of  economic  forces  and  the  equipose  or  balance  in  favor  of  the 
protection  of  the  rights  of  individuals  which  resulted.  That  is 
to  say,  as  it  was  deemed  that  monopoly  in  the  concrete  could 
only  arise  from  an  act  of  sovereign  power,  and,  such  sovereign 
power  being  restrained,  prohibitions  as  to  individuals  were 
directed  not  against  the  creation  of  monopoly,  but  were  only 
applied  to  such  acts  in  relation  to  particular  subjects  as  to  which 
it  was  deemed,  if  not  restrained,  some  of  the  consequences  of 
monopoly  might  result.  After  all,  this  was  but  an  instinctive 
recognition  of  the  truisms  that  the  course  of  trade  could  not  be 
made  free  by  obstructing  it,  and  that  an  individual's  right  to 
trade  could  not  be  protected  by  destroying  such  right. 

From  the  review  just  made  it  clearly  results  that  outside  of 
the  restrictions  resulting  from  the  want  of  power  in  an  individual 
to  voluntarily  and  unreasonably  restrain  his  right  to  carry  on 
his  trade  or  business,  and  outside  of  the  want  of  right  to  restrain 
the  free  course  of  trade  by  contracts  or  acts  which  implied  a 
wrongful  purpose,  freedom  to  contract  and  to  abstain  from  con- 
tracting, and  to  exercise  every  reasonable  right  incident  thereto, 
became  the  rule  in  the  English  law.  The  scope  and  effect  of 
this  freedom  to  trade  and  contract  is  clearly  shown  by  the 
decision  in  Mogul  S.  S.  Co.  v.  McGregor  [1891].  While  it  is 
true  that  the  decision  of  the  House  of  Lords  in  the  case  in  ques- 
tion was  announced  shortly  after  the  passage  of  the  anti-trust 
act,  it  serves  reflexly  to  show  the  exact  state  of  the  law  in  Eng- 
land at  the  time  the  anti-trust  statute  was  enacted. 

In  this  country  also  the  acts  from  which  it  was  deemed  there 
resulted  a  part,  if  not  all,  of  the  injurious  consequences  ascribed 
to  monopoly,  came  to  be  referred  to  as  a  monopoly  itself.  In 
other  words,  here  as  had  been  the  case  in  England,  practical 
common  sense  caused  attention  to  be  concentrated  not  upon  the 
theoretically  correct  name  to  be  given  to  the  condition  or  acts 


566  TRUSTS,    POOLS   AND    CORPORATIONS 

which  gave  rise  to  a  harmful  result,  but  to  the  result  itself  and 
to  the  remedying  of  the  evils  which  it  produced.  The  state- 
ment just  made  is  illustrated  by  an  early  statute  of  the  province 
of  Massachusetts,  that  is,  chap.  31  of  the  Laws  of  1 778-1 779, 
by  which  monopoly  and  forestalling  were  expressly  treated  as 
one  and  the  same  thing. 

It  is  also  true  that  while  the  principles  concerning  contracts 
in  restraint  of  trade,  that  is,  voluntary  restraint  put  by  a  person 
on  his  right  to  pursue  his  calling,  hence  only  operating  sub- 
jectively, came  generally  to  be  recognized  in  accordance  with 
the  English  rule,  it  came  moreover  to  pass  that  contracts  or  acts 
which  it  was  considered  had  a  monopolistic  tendency,  especially 
those  which  were  thought  to  unduly  diminish  competition  and 
hence  to  enhance  prices  —  in  other  words,  to  monopolize  —  came 
also  in  a  generic  sense  to  be  spoken  of  and  treated  as  they  had 
been  in  England,  as  restricting  the  due  course  of  trade,  and 
therefore  as  being  in  restraint  of  trade.  The  dread  of  monopoly 
as  an  emanation  of  governmental  power,  while  it  passed  at  an 
early  date  out  of  mind  in  this  country,  as  a  result  of  the  struc- 
ture of  our  government,  did  not  serve  to  assuage  the  fear  as  to 
the  evil  consequences  which  might  arise  from  the  acts  of  indi- 
viduals producing  or  tending  to  produce  the  consequences  of 
monopoly.  It  resulted  that  treating  such  acts  as  we  have  said 
as  amounting  to  monopoly,  sometimes  constitutional  restrictions, 
again  legislative  enactments  or  judicial  decisions,  served  to 
enforce  and  illustrate  the  purpose  to  prevent  the  occurrence  of 
the  evils  recognized  in  the  mother  country  as  consequent  upon 
monopoly,  by  providing  against  contracts  or  acts  of  individuals 
or  combinations  of  individuals  or  corporations  deemed  to  be 
conducive  to  such  results.  To  refer  to  the  constitutional  or  leg- 
islative provisions  on  the  subject,  or  the  many  judicial  decisions 
which  illustrate  it,  would  unnecessarily  prolong  this  opinion. 
We  append  in  the  margin  a  note  to  treaties,  etc.,  wherein  are  con- 
tained references  to  constitutional  and  statutory  provisions  and  to 
numerous  decisions,  etc.,  relating  to  the  subject.      [Omitted.] 

It  will  be  found  that,  as  modern  conditions  arose,  the  trend  of 
legislation  and  judicial  decision  came  more  and  more  to  adapt 
the  recognized  restrictions  to  new  manifestations  of  conduct  or 


DEFINITIVE    ANTI-TRUST    LAW    INTERPRETATION      567 

of  dealing  which  it  was  thought  justified  the  inf create- of  intent 
to  do  the  wrong  which  it  had  been  the  purpose  to  prevent  from 
the  beginning.  The  evolution  is  clearly  pointed  out  in  National 
Cotton  Oil  Co.  V.  Texas,  197  U.  S.  115,  49  L.  ed.  689,  25  Sup. 
Ct.  Rep.  379,  and  Shawnee  Compress  Co.  v.  Anderson,  209  U.  S. 
423,  52  L.  ed.  865,  28  Sup.  Ct.  Rep.  572 ;  and,  indeed,  will  be 
found  to  be  illustrated  in  various  aspects  by  the  decisions  of 
this  court  which  have  been  concerned  with  the  enforcement  of 
the  act  we  are  now  considerins:. 

Without  going  into  detail,  and  but  very  briefly  sur\-eying  the 
whole  field,  it  may  be  with  accuracy  said  that  the  dread  of  en- 
hancement of  prices  and  of  other  wrongs  which  it  was  thought 
would  flow  from  the  undue  limitation  on  competitive  conditions 
caused  by  contracts  or  other  acts  of  indiWduals  or  corporations 
led,  as  a  matter  of  public  policy,  to  the  prohibition  or  treating  as 
illegal  all  contracts  or  acts  which  were  unreasonably  restrictive 
of  competitive  conditions,  either  from  the  nature  or  character  of 
the  contract  or  act,  or  where  the  surrounding  circumstances 
were  such  as  to  justify  the  conclusion  that  they  had  not  been 
entered  into  or  performed  with  the  legitimate  purpose  of  reason- 
ably forwarding  personal  interest  and  developing  trade,  but,  on 
the  contrar}',  were  of  such  a  character  as  to  give  rise  to  the  in- 
ference or  presumption  that  they  had  been  entered  into  or  done 
with  the  intent  to  do  wrong  to  the  general  public  and  to  limit 
the  right  of  individuals,  thus  restraining  the  free  flow  of  com- 
merce and  tending  to  bring  about  the  evils,  such  as  enhance- 
ment of  prices,  which  were  considered  to  be  against  public 
policy.  It  is  equally  true  to  say  that  the  suney  of  the  legisla- 
tion in  this  country  on  this  subject  from  the  beginning  will  show, 
depending,  as  it  did,  upon  the  economic  conceptions  which 
obtained  at  the  time  when  the  legislation  was  adopted  or  judicial 
decision  was  rendered,  that  contracts  or  acts  were  at  one  time 
deemed  to  be  of  such  a  character  as  to  justify  the  inference  of 
wrongful  intent  which  were  at  another  period  thought  not  to  be 
of  that  character.  But  this  again,  as  we  have  seen,  simply  fol- 
lowed the  line  of  development  of  the  law  of  England. 

Let  us  consider  the  language  of  the  ist  and  2d  sections, 
guided  by  the  principle  that  where  words   are  employed  in  a 


568  TRUSTS,   POOLS   AND   CORPORATIONS 

statute  which  had  at  the  time  a  well-known  meaning  at  common 
law  or  in  the  law  of  this  country,  they  are  presumed  to  have 
been  used  in  that  sense  unless  the  context  compels  to  the  con- 
trary. 

As  to  the  1st  section,  the  words  to  be  interpreted  are: 
"  Every  contract,  combination  in  the  form  of  trust  or  otherwise, 
or  conspiracy  in  restraint  of  trade  or  commerce  ...  is  hereby 
declared  to  be  illegal."  As  there  is  no  room  for  dispute  that  the 
statute  was  intended  to  formulate  a  rule  for  the  regulation  of 
interstate  and  foreign  commerce,  the  question  is,  What  was  the 
rule  which  it  adopted  .-' 

In  view  of  the  common  law  and  the  law  in  this  country  as  to 
restraint  of  trade,  which  we  have  reviewed,  and  the  illuminating 
effect  which  that  history  must  have  under  the  rule  to  which  we 
have  referred,  we  think  it  results  : 

a.  That  the  context  manifests  that  the  statute  was  drawn  in 
the  light  of  the  existing  practical  conception  of  the  law  of  re- 
straint of  trade,  because  it  groups  as  within  that  class,  not  only 
contracts  which  were  in  restraint  of  trade  in  the  subjective 
sense,  but  all  contracts  or  acts  which  theoretically  were  attempts 
to  monopolize,  yet  which  in  practice  had  come  to  be  considered 
as  in  restraint  of  trade  in  a  broad  sense. 

b.  That  in  view  of  the  many  new  forms  of  contracts  and  com- 
binations which  were  being  evolved  from  existing  economic  con- 
ditions, it  was  deemed  essential  by  an  all-embracing  enumeration 
to  make  sure  that  no  form  of  contract  or  combination  by  which 
an  undue  restraint  of  interstate  or  foreign  commerce  was  brought 
about  could  save  such  restraint  from  condemnation.  The  stat- 
ute under  this  view  evidenced  the  intent  not  to  restrain  the  right 
to  make  and  enforce  contracts,  whether  resulting  from  combina- 
tions or  otherwise,  which  did  not  unduly  restrain  interstate  or 
foreign  commerce,  but  to  protect  that  commerce  from  being 
restrained  by  methods,  whether  old  or  new,  which  would  con- 
stitute an  interference,  —  that  is,  an  undue  restraint. 

c.  And  as  the  contracts  or  acts  embraced  in  the  provision 
were  not  expressly  defined,  since  the  enumeration  addressed 
itself  simply  to  classes  of  acts,  those  classes  being  broad  enough 
to  embrace  every  conceivable  contract  or  combination  which 


DEFINITIVE   ANTI-TRUST   LAW   INTERPRETATION     569 

could  be  made  concerning  trade  or  commerce  or  thtrsubjccts  of 
such  commerce,  and  thus  caused  any  act  done  by  any  of  the 
enumerated  methods  anywhere  in  the  whole  field  of  human 
activity  to  be  illegal  if  in  restraint  of  trade,  it  inevitably  follows 
that  the  provision  necessarily  called  for  the  exercise  of  judg- 
ment which  required  that  some  standard  should  be  resorted  to 
for  the  purpose  of  determining  whether  the  prohibition  con- 
tained in  the  statute  had  or  had  not  in  any  given  case  been 
violated.  Thus  not  specifying,  but  indubitably  contemplating 
and  requiring  a  standard,  it  follows  that  it  was  intended  that  the 
standard  of  reason  which  had  been  applied  at  the  common  law 
and  in  this  country  in  dealing  with  subjects  of  the  character 
embraced  by  the  statute  was  intended  to  be  the  measure  used 
for  the  purpose  of  determining  whether,  in  a  given  case,  a  par- 
ticular act  had  or  had  not  brought  about  the  wrong  against 
which  the  statute  provided. 

And  a  consideration  of  the  text  of  the  2d  section  serves  to 
establish  that  it  was  intended  to  supplement  the  ist,  and  to 
make  sure  that  by  no  possible  guise  could  the  public  policy  em- 
bodied in  the  ist  section  be  frustrated  or  evaded.  The  prohibi- 
tions of  the  2d  embrace  "every  person  who  shall  monopolize,  or 
attempt  to  monopolize,  or  combine  or  conspire  with  any  other 
person  or  persons  to  monopolize,  any  part  of  the  trade  or  com- 
merce among  the  several  states  or  with  foreign  nations  .  .  ." 
By  reference  to  the  terms  of  §  8,  it  is  certain  that  the  word  "  per- 
son "  clearly  implies  a  corporation  as  well  as  an  individual. 

The  commerce  referred  to  by  the  words  "  in  part,"  construed 
in  the  light  of  the  manifest  purpose  of  the  statute,  has  both  a 
geographical  and  a  distributive  significance ;  that  is,  it  includes 
any  portion  of  the  United  States  and  any  one  of  the  classes  of 
things  forming  a  part  of  interstate  or  foreign  commerce. 

Undoubtedly,  the  words  "  to  monopolize  "  and  "  monopoHze," 
as  used  in  the  section,  reach  every  act  bringing  about  the  pro- 
hibited results.  The  ambiguity,  if  any,  is  involved  in  determin- 
ing what  is  intended  by  monopolize.  But  this  ambiguity  is 
readily  dispelled  in  the  light  of  the  previous  history  of  the  law 
of  restraint  of  trade  to  which  we  have  referred  and  the  indica- 
tion which  it  gives  of  the  practical  evolution  by  which  monopoly 


570  TRUSTS,    POOLS  AND  CORPORATIONS 

and  the  acts  which  produce  the  same  result  as  monopoly,  that 
is,  an  undue  restraint  of  the  course  of  trade,  all  came  to  be 
spoken  of  as,  and  to  be  indeed  synonymous  with,  restraint  of 
trade.  In  other  words,  having  by  the  ist  section  forbidden  all 
means  of  monopolizing  trade,  that  is,  unduly  restraining  it  by 
means  of  every  contract,  combination,  etc.,  the  2d  section  seeks, 
if  possible,  to  make  the  prohibitions  of  the  act  all  the  more  com- 
plete and  perfect  by  embracing  all  attempts  to  reach  the  end 
prohibited  by  the  ist  section,  that  is,  restraints  of  trade,  by  any 
attempt  to  monopolize,  or  monopolization  thereof,  even  although 
the  acts  by  which  such  results  are  attempted  to  be  brought  about 
or  are  brought  about  be  not  embraced  within  the  general  enu- 
meration of  the  1st  section.  And,  of  course,  when  the  2d  section 
is  thus  harmonized  with  and  made,  as  it  was  intended  to  be,  the 
complement  of  the  ist,  it  becomes  obvious  that  the  criteria  to 
be  resorted  to  in  any  given  case  for  the  purpose  of  ascertaining 
whether  violations  of  the  section  have  been  committed  is  the 
rule  of  reason  guided  by  the  established  law  and  by  the  plain 
duty  to  enforce  the  prohibitions  of  the  act,  and  thus  the  public 
policy  which  its  restrictions  were  obviously  enacted  to  subserve. 
And  it  is  worthy  of  observation,  as  we  have  previously  remarked 
concerning  the  common  law,  that  although  the  statute,  by  the 
comprehensiveness  of  the  enumerations  embodied  in  both  the 
1st  and  2d  sections,  makes  it  certain  that  its  purpose  was  to  pre- 
vent undue  restraints  of  every  kind  or  nature,  nevertheless  by  the 
omission  of  any  direct  prohibition  against  monopoly  in  the  con- 
crete, it  indicates  a  consciousness  that  the  freedom  of  the  indi- 
vidual right  to  contract,  when  not  unduly  or  improperly  exercised, 
was  the  most  efficient  means  for  the  prevention  of  monopoly, 
since  the  operation  of  the  centrifugal  and  centripetal  forces  re- 
sulting from  the  right  to  freely  contract  was  the  means  by  which 
monopoly  would  be  inevitably  prevented  if  no  extraneous  or 
sovereign  power  imposed  it  and  no  right  to  make  unlawful  con- 
tracts having  a  monopolistic  tendency  were  permitted.  In  other 
words,  that  freedom  to  contract  was  the  essence  of  freedom 
from   undue  restraint  on  the  right  to  contract. 

Clear  as  it  seems  to  us  is  tlie  meaning  of  the  provisions  of  the 
statute  in  the  light  of  the  review  which  we  have  made,  never- 


DEFINITIVE   ANTI-TRUST   LAW    INTERPRETATION     571 

theless,  before  definitively  applying  that  meaningv^it  behooves 
us  to  consider  the  contentions  urged  on  one  side  or  the  other 
concerning  the  meaning  of  the  statute,  which,  if  maintained, 
would  give  to  it,  in  some  aspects,  a  much  wider  and  in  every 
view,  at  least,  a  somewhat  different,  significance.  And  to  do 
this  brings  us  to  the  second  question,  which,  at  the  outset,  we 
have  stated  it  was  our  purpose  to  consider  and  dispose  of. 

Second.  The  contentions  of  the  parties  as  to  the  meaning  of  the 
statute,  and  the  decisions  of  this  court  relied  upon  concerning  those 
contentions. 

In  substance,  the  propositions  urged  by  the  government  are 
reducible  to  this  :  That  the  language  of  the  statute  embraces 
every  contract,  combination,  etc.,  in  restraint  of  trade,  and 
hence  its  text  leaves  no  room  for  the  exercise  of  judgment,  but 
simply  imposes  the  plain  duty  of  applying  its  prohibitions  to 
every  case  within  its  literal  language.  The  error  involved  lies 
in  assuming  the  matter  to  be  decided.  This  is  true,  because,  as 
the  acts  which  may  come  under  the  classes  stated  in  the  ist 
section  and  the  restraint  of  trade  to  which  that  section  applies 
are  not  specifically  enumerated  or  defined,  it  is  obvious  that 
judgment  must  in  every  case  be  called  into  play  in  order  to 
determine  whether  a  particular  act  is  embraced  within  the 
statutory  classes,  and  whether,  if  the  act  is  within  such  classes, 
its  nature  or  effect  causes  it  to  be  a  restraint  of  trade  within  the 
intendment  of  the  act.  To  hold  to  the  contrary  would  require 
the  conclusion  either  that  every  contract,  act,  or  combination  of 
any  kind  or  nature,  whether  it  operated  a  restraint  on  trade  or 
not,  was  within  the  statute,  and  thus  the  statute  would  be 
destructive  of  all  right  to  contract  or  agree  or  combine  in  any 
respect  whatever  as  to  subjects  embraced  in  interstate  trade  or 
commerce,  or,  if  this  conclusion  were  not  reached,  then  the  con- 
tention would  require  it  to  be  held  that,  as  the  statute  did  not 
define  the  things  to  which  it  related,  and  excluded  resort  to  the 
only  means  by  which  the  acts  to  which  it  relates  could  be  ascer- 
tained, —  the  Hght  of  reason,  —  the  enforcement  of  the  statute 
was  impossible  because  of  its  uncertainty.  The  merely  generic 
enumeration  which  the  statute  makes  of  the  acts  to  which  it 
refers,  and  the  absence  of  any  definition  of  restraint  of  trade  as 


572  TRUSTS,    POOLS   AND   CORPORATIONS 

used  in  the  statute,  leaves  room  for  but  one  conclusion,  which 
is,  that  it  was  expressly  designed  not  to  unduly  limit  the  appHca- 
tion  of  the  act  by  precise  definition,  but,  while  clearly  fixing  a 
standard,  that  is,  by  defining  the  ulterior  boundaries  which 
could  not  be  transgressed  with  impunity,  to  leave  it  to  be 
determined  by  the  light  of  reason,  guided  by  the  principles  of 
law  and  the  duty  to  apply  and  enforce  the  public  policy  embodied 
in  the  statute,  in  every  given  case  whether  any  particular  act  or 
contract  was  within  the  contemplation  of  the  statute. 

But,  it  is  said,  persuasive  as  these  views  may  be,  they  may 
not  be  here  applied,  because  the  previous  decisions  of  this  court 
have  given  to  the  statute  a  meaning  which  expressly  excludes 
the  construction  which  must  result  from  the  reasoning  stated. 
The  cases  are  United  States  v.  Trans-Missouri  Freight  Asso. 
and  United  States  v.  Joint  Traffic  Asso.  Both  the  cases  in- 
volved the  legality  of  combinations  or  associations  of  railroads 
engaged  in  interstate  commerce  for  the  purpose  of  controlling 
the  conduct  of  the  parties  to  the  association  or  combination  in 
many  particulars.  The  association  or  combination  was  assailed 
in  each  case  as  being  in  violation  of  the  statute.  It  was  held 
that  they  were.  It  is  undoubted  that,  in  the  opinion  in  each  case, 
general  language  was  made  use  of,  which,  when  separated  from 
its  context,  would  justify  the  conclusion  that  it  was  decided  that 
reason  could  not  be  resorted  to  for  the  purpose  of  determining 
whether  the  acts  complained  of  were  within  the  statute.  It  is, 
however,  also  true  that  the  nature  and  character  of  the  contract 
or  agreement  in  each  case  was  fully  referred  to,  and  suggestions 
as  to  their  unreasonableness  pointed  out  in  order  to  indicate 
that  they  were  within  the  prohibitions  of  the  statute.  As  the 
cases  cannot,  by  any  possible  conception,  be  treated  as  author- 
itative without  the  certitude  that  reason  was  resorted  to  for  the 
purpose  of  deciding  them,  it  follows  as  a  matter  of  course  that 
it  must  have  been  held  by  the  light  of  reason,  since  the  conclu- 
sion could  not  have  been  otherwise  reached,  that  the  assailed 
contracts  or  agreements  were  within  the  general  enumeration  of 
the  statute,  and  that  their  operation  and  effect  brought  about 
the  restraint  of  trade  which  the  statute  prohibited.  This  being 
inevitable,  the  deduction  can  in  reason  only  be  this  :  That  in  the 


DEFINITIVE   ANTI-TRUST   LAW    INTERPRETATION      573 

cases  relied  upon,  it  having  been  found  that  the  acts-c«niplaincd 
of  were  within  the  statute,  and  operated  to  produce  the  injuries 
which  the  statute  forbade,  that  resort  to  reason  was  not  permis- 
sible in  order  to  allow  that  to  be  done  which  the  statute  pro- 
hibited. This  being  true,  the  rulings  in  the  case  relied  upon, 
when  rightly  appreciated,  were  therefore  this,  and  nothing 
more  :  That  as  considering  the  contracts  and  agreements,  their 
necessary  effect,  and  the  character  of  the  parties  by  whom  they 
were  made,  they  were  clearly  restraints  of  trade  within  the  pur- 
view of  the  statute,  they  could  not  be  taken  out  of  that  category 
by  indulging  in  general  reasoning  as  to  the  expediency  or  non- 
expediency  of  having  made  the  contracts,  or  the  wisdom  or 
want  of  wisdom  of  the  statute  which  prohibited  their  being 
made.  That  is  to  say,  the  cases  but  decided  that  the  nature 
and  character  of  the  contracts,  creating,  as  they  did,  a  conclu- 
sive presumption  which  brought  them  within  the  statute,  such 
result  was  not  to  be  disregarded  by  the  substitution  of  a  judicial 
appreciation  of  what  the  law  ought  to  be  for  the  plain  judicial 
duty  of  enforcing  the  law  as  it  was  made. 

But  aside  from  reasoning,  it  is  true  to  say  that  the  cases  relied 
upon  do  not,  when  rightly  construed,  sustain  the  doctrine  con- 
tended for,  is  established  by  all  of  the  numerous  decisions  of 
this  court  which  have  applied  and  enforced  the  anti-trust  act, 
since  they  all,  in  the  very  nature  of  things,  rest  upon  the  premise 
that  reason  was  the  guide  by  which  the  provisions  of  the  act 
were  in  every  case  interpreted.  Indeed,  intermediate  the  deci- 
sion of  the  two  cases,  that  is,  after  the  decision  in  the  Freight 
Association  Case,  and  before  the  decision  in  the  Joint  Traffic 
Case,  the  case  of  Hopkins  v.  United  States,  was  decided,  the 
opinion  being  delivered  by  Mr.  Justice  Peckham,  who  wrote 
both  the  opinions  in  the  Freight  Association  and  in  the  Joint 
Traffic  Cases.  And,  referring  in  the  Hopkins  Case  to  the  broad 
claim  made  as  to  the  rule  of  interpretation  announced  in  the 
Freight  Association  Case,  it  was  said  (page  592): 

To  treat  as  condemned  by  the  act  all  agreements  under  which,  as 
a  result,  the  cost  of  conducting  an  interstate  commercial  business 
may  be  increased,  would  enlarge  the  application  of  the  act  far  beyond 


574  TRUSTS,    POOLS   AND    CORPORATIONS 

the  fair  meaning  of  the  language  used.  There  must  be  some  direct 
and  immediate  effect  upon  interstate  commerce  in  order  to  come 
within  the  act. 

And  in  the  Joint  Traffic  case  this  statement  was  expressly- 
reiterated  and  approved  and  illustrated  by  example.  Like  limi- 
tation on  the  general  language  used  in  Freight  Association  and 
Joint  Traffic  cases  is  also  the  clear  result  of  E.  Bement  &  Sons 
V.  National  Harrow  Co.,  etc.,  etc. 

If  the  criterion  by  which  it  is  to  be  determined  in  all  cases 
whether  every  contract,  combination,  etc.,  is  a  restraint  of  trade 
within  the  intendment  of  the  law,  is  the  direct  or  indirect  effect 
of  the  acts  involved,  then  of  course  the  rule  of  reason  becomes 
the  guide,  and  the  construction  which  we  have  given  the  statute, 
instead  of  being  refuted  by  the  cases  relied  upon,  is  by  those 
cases  demonstrated  to  be  correct.  This  is  true,  because  the  con- 
struction which  we  have  deduced  from  the  history  of  the  act 
and  the  analysis  of  its  text  is  simply  that  in  every  case  where  it 
is  claimed  that  an  act  or  acts  are  in  violation  of  the  statute,  the 
rule  of  reason,  in  the  light  of  the  principles  of  law  and  the 
pubhc  policy  which  the  act  embodies,  must  be  applied.  From 
this  it  follows,  since  that  rule  and  the  result  of  the  test  as 
to  direct  or  indirect,  in  their  ultimate  aspect,  come  to  one 
and  the  same  thing,  that  the  difference  between  the  two  is  there- 
fore only  that  which  obtains  between  things  which  do  not  differ 
at  all. 

If  it  be  true  that  there  is  this  identity  of  result  between  the 
rule  intended  to  be  applied  in  the  Freight  Association  case, 
that  is,  the  rule  of  direct  and  indirect,  and  the  rule  of  reason 
which,  under  the  statute  as  we  construe  it,  should  be  here 
applied,  it  may  be  asked  how  was  it  that,  in  the  opinion  in  the 
Freight  Association  case,  much  consideration  was  given  to  the 
subject  of  whether  the  agreement  or  combination  which  was 
involved  in  that  case  could  be  taken  out  of  the  prohibitions  of 
the  statute  upon  the  theory  of  its  reasonableness.  The  question 
is  pertinent  and  must  be  fully  and  frankly  met;  for  if  it  be  now 
deemed  that  the  Freight  Association  case  was  mistakenly  de- 
cided or  too  broadly  stated,  the  doctrine  which  it  announced 
should  be  either  expressly  overruled  or  limited. 


DEFINITIVK    ANTI-TRUST   LAW    INTERPRI':TATI0N      575 

The  confusion  which  gives  rise  to  the  question  rfisjalts  from 
faiHng  to  distinguish  between  the  want  of  power  to  take  a  case 
which,  by  its  terms  or  the  circumstances  which  surrounded  it, 
considering  among  such  circumstances  the  character  of  the 
parties,  is  plainly  within  the  statute,  out  of  the  operation  of 
the  statute  by  resort  to  reason  in  effect  to  establish  that  the 
contract  ought  not  to  be  treated  as  within  the  statute,  and 
the  duty  in  every  case  where  it  becomes  necessary  from  the 
nature  and  character  of  the  parties  to  decide  whether  it  was 
within  the  statute,  to  pass  upon  that  question  by  the  light  of 
reason.  This  distinction,  we  think,  serves  to  point  out  what,  in 
its  ultimate  conception,  was  the  thought  underlying  the  reference 
to  the  rule  of  reason  made  in  the  Freight  Association  case,  — 
especially  when  such  reference  is  interpreted  by  the  context 
of  the  opinion  and  in  the  light  of  the  subsequent  opinion  in  the 
Hopkins  case  and  in  Cincinnati,  P.  B.  S.  &  P.  Packet  Co.  v.  Bay. 

And  in  order  not  in  the  slightest  degree  to  be  wanting  in 
frankness,  we  say  that  in  so  far,  however,  as  by  separating  the 
general  language  used  in  the  opinions  in  the  Freight  Associa- 
tion and  Joint  Traffic  cases  from  the  context  and  the  subject 
and  parties  with  which  the  cases  were  concerned,  it  may  be  con- 
ceived that  the  language  referred  to  conflicts  with  the  construc- 
tion which  we  give  the  statute,  they  arc  necessarily  now  limited 
and  qualified.  We  see  no  possible  escape  from  this  conclusion 
if  we  are  to  adhere  to  the  many  cases  decided  in  this  court  in 
which  the  anti-trust  law  has  been  applied  and  enforced,  and  if 
the  duty  to  apply  and  enforce  that  law  in  the  future  is  to  con- 
tinue to  exist.  The  first  is  true,  because  the  construction  which 
we  now  give  the  statute  does  not  in  the  slightest  degree  conflict 
with  a  single  previous  case  decided  concerning  the  anti-trust  law, 
aside  from  the  contention  as  to  the  Freight  Association  and 
Joint  Trafific  cases,  and  because  every  one  of  those  cases  applied 
the  rule  of  reason  for  the  purpose  of  determining  whether  the 
subject  before  the  court  was  within  the  statute.  The  second  is 
also  true,  since,  as  we  have  already  pointed  out,  unaided  by  the 
light  of  reason  it  is  impossible  to  understand  how  the  statute  may 
in  the  future  be  enforced  and  the  public  policy  which  it  es- 
tablishes be  made  efficacious. 


576  TRUSTS,    POOLS  AND   CORPORATIONS 

So  far  as  the  objections  of  the  appellants  are  concerned,  they 
are  all  embraced  under  two  headings  : 

a.  That  the  act,  even  if  the  averments  of  the  bill  be  true, 
cannot  be  constitutionally  applied,  because  to  do  so  would  ex- 
tend the  power  of  Congress  to  subjects  deJiors  the  reach  of  its 
authority  to  regulate  commerce,  by  enabling  that  body  to  deal 
with  mere  questions  of  production  of  commodities  within  the 
states.  But  all  the  structure  upon  which  this  argument  proceeds 
is  based  upon  the  decision  in  United  States  v.  E.  C.  Knight  Co} 
The  view,  however,  which  the  argument  takes  of  that  case,  and 
the  arguments  based  upon  that  view,  have  been  so  repeatedly 
pressed  upon  this  court  in  connection  with  the  interpretation  and 
enforcement  of  the  anti-trust  act,  and  have  been  so  necessarily 
and  expressly  decided  to  be  unsound,  as  to  cause  the  contentions 
to  be  plainly  foreclosed  and  to  require  no  express  notice. 

b.  Many  arguments  are  pressed  in  various  forms  of  state- 
ment which  in  substance  amount  to  contending  that  the  statute 
cannot  be  applied  under  the  facts  of  this  case  without  impairing 
rights  of  property  and  destroying  the  freedom  of  contract  or 
trade  which  is  essentially  necessary  to  the  well-being  of  society, 
and  which,  it  is  insisted,  is  protected  by  the  constitutional 
guaranty  of  due  process  of  law.  But  the  ultimate  foundation  of 
all  these  arguments  is  the  assumption  that  reason  may  not  be 
resorted  to  in  interpreting  and  applying  the  statute,  and  there- 
fore that  the  statute  unreasonably  restricts  the  right  to  contract, 
and  unreasonably  operates  upon  the  right  to  acquire  and  hold 
property.  As  the  premise  is  demonstrated  to  be  unsound  by  the 
construction  we  have  given  the  statute,  of  course  the  proposi- 
tions which  rest  upon  that  premise  need  not  be  further  noticed. 

So  far  as  the  arguments  proceed  upon  the  conception  that,  in 
view  of  the  generality  of  the  statute,  it  is  not  susceptible  of  being 
enforced  by  the  courts  because  it  cannot  be  carried  out  without 
a  judicial  exertion  of  legislative  power,  they  are  clearly  unsound. 
The  statute  certainly  generically  enumerates  the  character  of  acts 
which  it  prohibits  and  the  wrong  which  it  was  intended  to  pre- 
vent. The  propositions  therefore  insist  that,  consistently  with  the 
fundamental  principles  of  due  process  of  law,  it  never  can  be 

1  P.  506,  supra. 


DEFINITIVE    ANTI-TRUST    LAW   INTERPRETATION      577 

left  to  the  judiciary  to  decide  whether,  in  a  given  cast^rparticular 
acts  come  within  a  generic  statutory  provision.  But  to  reduce 
the  propositions,  however,  to  this,  their  final  meaning,  makes  it 
clear  that  in  substance  they  deny  the  existence  of  essential  legis- 
lative authority,  and  challenge  the  right  of  the  judiciary  to  per- 
form duties  which  that  department  of  the  government  has  exerted 
from  the  beginning.  This  is  so  clear  as  to  require  no  elaboration. 
Yet,  let  us  demonstrate  that  which  needs  no  demonstration,  by  a 
few  obvious  examples.  Take,  for  instance,  the  familiar  cases 
where  the  judiciary  is  called  upon  to  determine  whether  a  par- 
ticular act  or  acts  are  within  a  given  prohibition,  depending  upon 
wrongful  intent.  Take  questions  of  fraud.  Consider  the  power 
which  must  be  exercised  in  every  case  where  the  courts  are  called 
upon  to  determine  whether  particular  acts  are  invalid  which  are, 
abstractly  speaking,  in  and  of  themselves  valid,  but  which  are 
asserted  to  be  invalid  because  of  their  direct  effect  upon  inter- 
state commerce. 

We  come,  then,  to  the  third  proposition  requiring  considera- 
tion, viz : 

Third.      The  facts  and  the  application  of  the  statute  to  tJievi. 

Beyond  dispute  the  proofs  establish  substantially  as  alleged  in 
the  bill  the  following  facts  : 

1.  The  creation  of  the  Standard  Oil  Company  of  Ohio. 

2.  The  organization  of  the  Standard  Oil  Trust  of  1882,  and 
also  a  previous  one  of  1879,  not  referred  to  in  the  bill,  and  the 
proceedings  in  the  supreme  court  of  Ohio,  culminating  in  a 
decree  based  upon  the  finding  that  the  company  was  unlawfully 
a  party  to  that  trust;  the  transfer  by  the  trustees  of  stocks  in 
certain  of  the  companies ;  the  contempt  proceedings ;  and,  finally, 
the  increase  of  the  capital  of  the  Standard  Oil  Company  of  New 
Jersey  and  the  acquisition  by  that  company  of  the  shares  of  the 
stock  of  the  other  corporations  in  exchange  for  its  certificates. 

The  vast  amount  of  property  and  the  possibilities  of  far-reach- 
ing control  which  resulted  from  the  facts  last  stated  are  shown 
by  the  statement  which  we  have  previously  annexed  concerning 
the  parties  to  the  trust  agreement  of  1882,  and  the  corporations 
whose  stock  was  held  by  the  trustees  under  the  trust,  and 
which  came  therefore  to  be  held  by  the  New  Jersey  corpora- 


578  TRUSTS,    POOLS   AND    CORPORATIONS 

tion.  But  these  statements  do  not  with  accuracy  convey  an 
appreciation  of  the  situation  as  it  existed  at  the  time  of  the 
entry  of  the  decree  below,  since,  during  the  more  than  ten  years 
which  elapsed  between  the  acquiring  by  the  New  Jersey  cor- 
poration of  the  stock  and  other  property  which  was  formerly 
held  by  the  trustees  under  the  trust  agreement,  the  situation,  of 
course,  had  somewhat  changed,  —  a  change  which,  when  analyzed 
in  the  light  of  the  proof,  we  think  establishes  that  the  result  of 
enlarging  the  capital  stock  of  the  New  Jersey  company  and 
giving  it  the  vast  power  to  which  we  have  referred  produced  its 
normal  consequence ;  that  is,  it  gave  to  the  corporation,  despite 
enormous  dividends  and  despite  the  dropping  out  of  certain  cor- 
porations enumerated  in  the  decree  of  the  court  below,  an  en- 
larged and  more  perfect  sway  and  control  over  the  trade  and 
commerce  in  petroleum  and  its  products. 

Giving  to  the  facts  just  stated  the  weight  which  it  was  deemed 
they  were  entitled  to,  in  the  light  afforded  by  the  proof  of  other 
cognate  facts  and  circumstances,  the  court  below  held  that  the 
acts  and  dealings  established  by  the  proof  operated  to  destroy 
the  "  potentiality  of  competition  "  which  otherwise  would  have 
existed  to  such  an  extent  as  to  cause  the  transfers  of  stock  which 
were  made  to  the  New  Jersey  corporation  and  the  control  which 
resulted  over  the  many  and  various  subsidiary  corporations  to  be 
a  combination  or  conspiracy  in  restraint  of  trade,  in  violation  of 
the  ist  section  of  the  act,  but  also  to  be  an  attempt  to  monopolize 
and  monopolization  bringing  about  a  perennial  violation  of  the 
2d  section. 

We  see  no  cause  to  doubt  the  correctness  of  these  conclusions, 
considering  the  subject  from  every  aspect ;  that  is,  both  in  view 
of  the  facts  established  by  the  record  and  the  necessary  opera- 
tion and  effect  of  the  law  as  we  have  construed  it  upon  the  in- 
ferences deducible  from  the  facts,  for  the  following  reasons : 

a.  Because  the  unification  of  power  and  control  over  petroleum 
and  its  products  which  was  the  inevitable  result  of  the  combining 
in  the  New  Jersey  corporation  by  the  increase  of  its  stock  and 
the  transfer  to  it  of  the  stocks  of  so  many  other  corporations, 
aggregating  so  vast  a  capital,  gives  rise,  in  and  of  itself,  in  the 
absence  of  countervailing  circumstances,  to  say  the  least,  to  the 


DEFINITIVE   ANTI-TRUST   LAW    INTERPRETATION     579 

prima  facie  presumption  of  intent  and  purpose  to  m^ntain  the 
dominancy  over  thie  oil  industry,  not  as  a  result  of  normal 
methods  of  industrial  development,  but  by  new  means  of  com- 
bination which  were  resorted  to  in  order  that  greater  power 
might  be  added  than  would  otherwise  have  arisen  had  normal 
methods  been  followed,  the  whole  with  the  purpose  of  excluding 
others  from  the  trade,  and  thus  centralizing  in  the  combination 
a  perpetual  control  of  the  movements  of  petroleum  and  its 
products  in  the  channels  of  interstate  commerce. 

b.  Because  the  prima  facie  presumption  of  intent  to  restrain 
trade,  to  monopolize  and  to  bring  about  monopolization,  result- 
ing from  the  act  of  expanding  the  stock  of  the  New  Jersey  cor- 
poration and  vesting  it  with  such  vast  control  of  the  oil  industry, 
is  made  conclusive  by  considering  (i)  the  conduct  of  the  per- 
sons or  corporations  who  were  mainly  instrumental  in  bringing 
about  the  extension  of  power  in  the  New  Jersey  corporation 
before  the  consummation  of  that  result  and  prior  to  the  forma- 
tion of  the  trust  agreements  of  1879  and  1882;  (2)  by  consider- 
ing the  proof  as  to  what  was  done  under  those  agreements  and 
the  acts  which  immediately  preceded  the  vesting  of  power  in 
the  New  Jersey  corporation,  as  well  as  by  weighing  the  modes 
in  which  the  power  vested  in  that  corporation  has  been  exerted 
and  the  results  which  have  arisen  from  it. 

Recurring  to  the  acts  done  by  the  individuals  or  corporations 
who  were  mainly  instrumental  in  bringing  about  the  expansion 
of  the  New  Jersey  corporation  during  the  period  prior  to  the 
formation  of  the  trust  agreements  of  1879  and  1882,  including 
those  agreements,  not  for  the  purpose  of  weighing  the  substan- 
tial merit  of  the  numerous  charges  of  wrongdoing  made  during 
such  period,  but  solely  as  an  aid  for  discovering  intent  and  pur- 
pose, we  think  no  disinterested  mind  can  survey  the  period  in 
question  without  being  irresistibly  driven  to  the  conclusion  that 
the  very  genius  for  commercial  development  and  organization 
which  it  would  seem  was  manifested  from  the  beginning  soon 
begot  an  intent  and  purpose  to  exclude  others  which  was  fre- 
quently manifested  by  acts  and  dealings  wholly  inconsistent 
with  the  theory  that  they  were  made  with  the  single  conception 
of  advancing  the  development  of  business  power  by  usual  meth- 


58o  TRUSTS,    POOLS   AND    CORPORATIONS 

ods,  but  which,  on  the  contrary,  necessarily  involved  the  intent 
to  drive  others  from  the  field  and  to  exclude  them  from  their 
right  to  trade,  and  thus  accomplish  the  mastery  which  was  the 
end  in  view.  And,  considering  the  period  from  the  date  of  the 
trust  agreements  of  1879  and  1882,  up  to  the  time  of  the  expan- 
sion of  the  New  Jersey  corporation,  the  gradual  extension  of  the 
power  over  the  commerce  in  oil  which  ensued,  the  decision  of 
the  supreme  court  of  Ohio,  the  tardiness  or  reluctance  in  con- 
forming to  the  commands  of  that  decision,  the  methods  first 
adopted  and  that  which  finally  culminated  in  the  plan  of  the 
New  Jersey  corporation,  all  additionally  serve  to  make  manifest 
the  continued  existence  of  the  intent  which  we  have  previously 
indicated,  and  which,  among  other  things,  impelled  the  expan- 
sion of  the  New  Jersey  corporation.  The  exercise  of  the  power 
which  resulted  from  that  organization  fortifies  the  foregoing 
conclusions,  since  the  development  which  came,  the  acquisition 
here  and  there  which  ensued  of  every  efficient  means  by  which 
competition  could  have  been  asserted,  the  slow  but  resistless 
methods  which  followed  by  which  means  of  transportation  were 
absorbed  and  brought  under  control,  the  system  of  marketing 
which  was  adopted  by  which  the  country  was  divided  into  dis- 
tricts and  the  trade  in  each  district  in  oil  w^as  turned  over  to  a 
designated  corporation  within  the  combination,  and  all  others 
were  excluded,  all  lead  the  mind  up  to  a  conviction  of  a  purpose 
and  intent  which  we  think  is  so  certain  as  practically  to  cause 
the  subject  not  to  be  within  the  domain  of  reasonable  contention. 
The  inference  that  no  attempt  to  monopolize  could  have  been 
intended,  and  that  no  monopolization  resulted  from  the  acts 
complained  of,  since  it  is  established  that  a  very  small  percent- 
age of  the  crude  oil  produced  was  controlled  by  the  combination, 
is  unwarranted.  As  substantial  power  over  the  crude  product 
was  the  inevitable  result  of  the  absolute  control  which  existed 
over  the  refined  product,  the  monopolization  of  the  one  carried 
with  it  the  power  to  control  the  other;  and  if  the  inferences 
which  this  situation  suggests  were  developed,  which  we  deem 
it  unnecessary  to  do,  they  might  well  serve  to  add  additional 
cogency  to  the  presumption  of  intent  to  monopolize  which  we 
have  found  arises  from  the  unquestioned  proof  on  other  subjects. 


DEFINITIVE   ANTI-TRUST    LAW    INTERPRETATION      581 

We  arc  thus  brought  to  the  last  subject  which  w^arc  called 
upon  to  consider,  viz.  : 

Fourth.      The  remedy  to  be  administered. 

Let  us,  then,  as  a  means  of  accurately  determining  what  relief 
we  are  to  afford,  first  come  to  consider  what  relief  was  afforded 
by  the  court  below,  in  order  to  fix  how  far  it  is  necessary  to  take 
from  or  add  to  that  relief,  to  the  end  that  the  prohibitions  of 
the  statute  may  have  complete  and  operative  force. 

The  court  below,  by  virtue  of  §§  i,  2,  and  4  of  its  decree, 
which  we  have  in  part  excerpted  in  the  margin,  [Omitted.] 
adjudged  that  the  New  Jersey  corporation,  in  so  far  as  it  held 
the  stock  of  the  various  corporations  recited' in  §§  2  and  4  of 
the  decree,  or  controlled  the  same,  was  a  combination  in  viola- 
tion of  the  I  St  section  of  the  act,  and  an  attempt  to  monopolize 
or  a  monopolization  contrary  to  the  2d  section  of  the  act.  It 
commanded  the  dissolution  of  the  combination,  and  therefore 
in  effect  directed  the  transfer  by  the  New  Jersey  corporation 
back  to  the  stockholders  of  the  various  subsidiary  corporations 
entitled  to  the  same  of  the  stock  which  had  been  turned  over 
to  the  New  Jersey  company  in  exchange  for  its  stock.  To 
make  this  command  effective,  §  5  of  the  decree  forbade  the  New 
Jersey  corporation  from  in  any  form  or  manner  exercising  any 
ownership  or  exerting  any  power  directly  or  indirectly  in  virtue 
of  its  apparent  title  to  the  stocks  of  the  subsidiary  corporations, 
and  prohibited  those  subsidiary  corporations  from  paying  any 
dividends  to  the  New  Jersey  corporations,  or  doing  any  act 
which  would  recognize  further  power  in  that  company,  except 
to  the  extent  that  it  was  necessary  to  enable  that  company  to 
transfer  the  stock.  So  far  as  the  owners  of  the  stock  of  the 
subsidiary  corporations  and  the  corporations  themselves  were 
concerned  after  the  stock  had  been  transferred,  §  6  of  the  de- 
cree enjoined  them  from  in  any  way  conspiring  or  combining 
to  violate  the  act,  or  to  monopolize  or  attempt  to  monopolize  in 
virtue  of  their  ownership  of  the  stock  transferred  to  them,  and 
prohibited  all  agreements  between  the  subsidiary  corporations, 
or  other  stockholders  in  the  future,  tending  to  produce  or  bring 
about  further  violations  of  the  act. 

By  §  7,  pending  the  accomplishment  of  the  dissolution  of  the 


582  TRUSTS,    POOLS   AND    CORPORATIONS 

combination  by  the  transfer  of  stock,  and  until  it  was  consum- 
mated, the  defendants  named  in  §  i,  constituting  all  the  corpora- 
tions to  which  we  have  referred,  were  enjoined  from  engaging 
in  or  carrying  on  interstate  commerce.  And  by  §  9,  among 
other  things,  a  delay  of  thirty  days  was  granted  for  the  carry- 
ing into  effect  of  the  directions  of  the  decree. 

So  far  as  the  decree  held  that  the  ownership  of  the  stock  of 
the  New  Jersey  corporation  constituted  a  combination  in  viola- 
tion of  the  1st  section  and  an  attempt  to  create  a  monopoly 
or  to  monopolize  under  the  2d  section,  and  commanded  the  dis- 
solution of  the  combination,  the  decree  was  clearly  appropriate. 
And  this  also  is  true  of  §  5  of  the  decree,  which  restrained  both 
the  New  Jersey  corporation  and  the  subsidiary  corporations  from 
doing  anything  which  would  recognize  or  give  effect  to  further 
ownership  in  the  New  Jersey  corporation  of  the  stocks  which 
were  ordered  to  be  retransferred. 

Our  conclusion  is  that  the  decree  below  was  right  and  should 
be  affirmed,  except  as  to  the  minor  matters  concerning  which 
we  have  indicated  the  decree  should  be  modified. 

And  it  is  so  ordered. 

Mr.  Justice  Harlan,  concurring  in  part  and  dissenting  in  part: 

A  sense  of  duty  constrains  me  to  express  the  objections  which 
I  have  to  certain  declarations  in  the  opinion  just  delivered  on 
behalf  of  the  court. 

I  concur  in  holding  that  the  Standard  Oil  Company  of  New 
Jersey  and  its  subsidiary  companies  constitute  a  combination  in 
restraint  of  interstate  commerce,  and  that  they  have  attempted 
to  monopolize  and  have  monopolized  parts  of  such  commerce, 
—  all  in  violation  of  what  is  known  as  the  anti-trust  act  of  1890. 
The  evidence  in  this  case  overwhelmingly  sustained  that  view  and 
led  the  circuit  court,  by  its  final  decree,  to  order  the  dissolution 
of  the  New  Jersey  corporation  and  the  discontinuance  of  the 
illegal  combination  between  that  corporation  and  its  subsidiary 
companies. 

In  my  judgment,  the  decree  below  should  have  been  affirmed 
without  qualification.  But  the  court,  while  afiirming  the  decree, 
directs  some  modifications  in  respect  of  what  it  characterizes  as 
"  minor  matters."     It  is  to  be  apprehended  that  those  modifica- 


DEFINITIVE   ANTI-TRUST   LAW   INTERPRETATION     5S3 

tions  may  prove  to  be  mischievous.  In  saying  thisT^have  par- 
ticularly in  view  the  statement  in  the  opinion  that  "  it  docs  not 
necessarily  follow  because  an  illegal  restraint  of  trade  or  an 
attempt  to  monopolize  or  a  monopolization  resulted  from  the 
combinations  and  the  transfer  of  the  stocks  of  the  subsidiary  cor- 
poration to  the  New  Jersey  corporation,  that  a  like  restraint  of 
trade  or  attempt  to  monopolize  or  monopolization  would  neces- 
sarily arise  from  agreements  between  one  or  more  of  the  sub- 
sidiary corporations  after  the  transfer  of  the  stock  by  the  New 
Jersey  corporation."  Taking  this  language,  in  connection  with 
other  parts  of  the  opinion,  the  subsidiary  companies  are  thus,  in 
effect,  informed — unwisely,  I  think  —  that  although  the  New 
Jersey  corporation,  being  an  illegal  combination,  must  go  out  of 
existence,  tJiey  may  join  in  an  agreement  to  restrain  commerce 
among  the  states  if  such  restraint  be  not  "  undue." 

In  order  that  my  objections  to  certain  parts  of  the  court's 
opinion  may  distinctly  appear,  I  must  state  the  circumstances 
under  which  Congress  passed  the  anti-trust  act,  and  trace  the 
course  of  judicial  decisions  as  to  its  meaning  and  scope.  This  is 
the  more  necessary  because  the  court  by  its  decision,  when  inter- 
preted by  the  language  of  its  opinion,  has  not  only  upset  the 
long-settled  interpretation  of  the  act,  but  has  usurped  the  con- 
stitutional functions  of  the  legislative  branch  of  the  government. 
With  all  due  respect  for  the  opinions  of  others,  I  feel  bound  to 
say  that  what  the  court  has  said  may  well  cause  some  alarm  for 
the  integrity  of  our  institutions.  Let  us  see  how  the  matter 
stands. 

All  who  recall  the  condition  of  the  country  in  1890  will  re- 
member that  there  was  everywhere,  among  the  people  generally, 
a  deep  feeling  of  unrest.  The  nation  had  been  rid  of  human 
slavery,  —  fortunately,  as  all  now  feel,  —  but  the  conviction  was 
universal  that  the  country  was  in  real  danger  from  another  kind 
of  slavery  sought  to  be  fastened  on  the  American  people ; 
namely,  the  slavery  that  would  result  from  aggregations  of 
capital  in  the  hands  of  a  few  individuals  and  corporations  con- 
trolling, for  their  own  profit  and  advantage  exclusively,  the  en- 
tire business  of  the  country,  including  the  production  and  sale 
of  the  necessaries  of  life.     Such  a  danger  was  thought  to  be 


584  TRUSTS,   POOLS   AND   CORPORATIONS 

then  imminent,  and  all  felt  that  it  must  be  met  firmly  and  by 
such  statutory  regulations  as  would  adequately  protect  the  peo- 
ple against  oppression  and  wrong.  Congress  therefore  took  up 
the  matter  and  gave  the  whole  subject  the  fullest  consideration. 
All  agreed  that  the  national  government  could  not,  by  legisla- 
tion, regulate  the  domestic  trade  carried  on  wholly  within  the 
several  states  ;  for  power  to  regulate  such  trade  remained  with, 
because  never  surrended  by,  the  states.  But,  under  authority 
expressly  granted  to  it  by  the  Constitution,  Congress  could 
regulate  commerce  among  the  several  states  and  with  foreign 
states.  Its  authority  to  regulate  such  commerce  was  and  is 
paramount,  due  force  being  given  to  other  provisions  of  the 
fundamental  law,  devised  by  the  fathers  for  the  safety  of  the 
government  and  for  the  protection  and  security  of  the  essential 
rights  inhering  in  life,  liberty,  and  property. 

Guided  by  these  considerations,  and  to  the  end  that  the  people, 
so  far  as  interstate  commerce  was  concerned,  might  not  be  domi- 
nated by  vast  combinations  and  monopolies,  having  power  to 
advance  their  own  selfish  ends,  regardless  of  the  general  interests 
and  welfare,  Congress  passed  the  anti-trust  act  of  1890  in  these 
words.      [P.  484,  supra. '\ 

I  have  made  these  extended  extracts  from  the  opinion  of  the 
court  in  the  Trans-Missouri  Freight  case  in  order  to  show  beyond 
question  that  the  point  was  there  urged  by  counsel  that  the  anti- 
trust act  condemned  only  contracts,  combinations,  trusts,  and 
conspiracies  that  were  in  imreasonable  restraint  of  interstate 
commerce,  and  that  the  court  in  clear  and  decisive  language 
met  that  point.  It  adjudged  that  Congress  had  in  unequivocal 
words  declared  that  "  every  contract,  combination  in  the  form  of 
trust  or  otherwise,  or  conspiracy,  in  restraint  of  commerce  among 
the  several  states,"  shall  be  illegal,  and  that  no  distinction,  so 
far  as  interstate  commerce  was  concerned,  was  to  be  tolerated 
between  restraints  of  such  commerce  as  were  undue  or  unrea- 
sonable, and  restraints  that  were  due  or  reasonable.  With 
full  knowledge  of  the  then  condition  of  the  country  and  of  its 
business,  Congress  determined  to  meet,  and  did  meet,  the  situa- 
tion by  an  absolute,  statutory  prohibition  of  ''every  contract, 
combination  in  the  form  of  trusts  or  otherwise,  in  restraint  of 


DEFINITIVE   ANTI-TRUST   LAW   INTERPRETATION      5.S5 

trade  or  commerce."  Still  more  ;  in  response  to  thc^Sttggcstion 
by  able  counsel  that  Congress  intended  only  to  strike  down  such 
contracts,  combinations,  and  monopolies  as  unreasonably  re- 
strained interstate  commerce,  this  court,  in  words  too  clear  to  be 
misunderstood,  said  that  to  so  hold  was  "  to  read  into  the  act  by 
way  oi  judicial  legislation,  an  exception  not  placed  there  by  the 
lawmaking  branch  of  the  government."  "  This,"  the  court  said, 
as  we  have  seen,  "tc^  cannot  and  ought  not  to  do." 

It  thus  appears  that  fifteen  years  ago,  when  the  purpose  of 
Congress  in  passing  the  anti-trust  act  was  fresh  in  the  minds  of 
courts,  lawyers,  statesmen,  and  the  general  public,  this  court 
expressly  declined  to  indulge  in  judicial  legislation,  by  inserting 
in  the  act  the  word  "  unreasonable  "  or  any  other  word  of  like 
import.  It  may  be  stated  here  that  the  country  at  large  ac- 
cepted this  view  of  the  act,  and  the  Federal  courts  throughout 
the  entire  country  enforced  its  provisions  according  to  the  in- 
terpretation given  in  the  Freight  Association  case.  What,  then, 
was  to  be  done  by  those  who  questioned  the  soundness  of  the 
interpretation  placed  on  the  act  by  this  court  in  that  case  }  As 
the  court  had  decided  that  to  insert  the  word  "unreasonable" 
in  the  act  would  be  "judicial  legislation"  on  its  part,  the  only 
alternative  left  to  those  who  opposed  the  decision  in  that  case 
was  to  induce  Congress  to  so  amend  the  act  as  to  recognize 
the  right  to  restrain  interstate  commerce  to  a  reasojiable  extent. 
The  pubUc  press,  magazines,  and  law  journals,  the  debates  in 
Congress,  speeches,  and  addresses  by  public  men  and  jurists, 
all  contain  abundant  evidence  of  the  general  understanding  that 
the  meaning,  extent,  and  scope  of  the  anti-trust  act  had  been 
judicially  determined  by  this  court,  and  that  the  only  question 
remaining  open  for  discussion  was  the  wisdom  of  the  policy  de- 
clared by  the  act,  —  a  matter  that  was  exclusively  within  the 
cognizance  of  Congress.  But  at  every  session  of  Congress  since 
the  decision  of  1896,  the  lawmaking  branch  of  the  government, 
with  full  knowledge  of  that  decision,  has  refused  to  change  the 
policy  it  had  declared,  or  to  so  amend  the  act  of  1890,  as  to  ex- 
cept from  its  operation  contracts,  combinations,  and  trusts  that 
reasonably  restrain  interstate  commerce. 

But  those  who  were  in  combinations  that  were  illegal  did  not 


586  TRUSTS,    POOLS   AND    CORPORATIONS 

despair.  They  at  once  set  up  the  baseless  claim  that  the  deci- 
sion of  1896  disturbed  the  "business  interests  of  the  country," 
and  let  it  be  known  that  they  would  never  be  content  until  the 
rule  was  established  that  would  permit  interstate  commerce  to 
be  subjected  to  reasonable  restraints.  Finally,  an  opportunity 
came  again  to  raise  the  same  question  which  this  court  had, 
upon  full  consideration,  determined  in  1896.  I  now  allude  to 
the  case  of  United  States  \.  Joint  Traffic  Asso. 

These  utterances,  taken  in  connection  with  what  was  pre- 
viously said  in  the  Trans-Missouri  Freight  case,  show  so  clearly 
and  affirmatively  as  to  admit  of  no  doubt  that  this  court,  many 
years  ago,  upon  the  fullest  consideration,  interpreted  the  anti- 
trust act  as  prohibiting  and  making  illegal  not  only  every  con- 
tract or  combination,  in  whatever  form,  which  was  in  restraint  of 
interstate  commerce,  without  regard  to  its  reasonableness  or  un- 
reasonableness, but  all  monopoHes  or  attempt  to  monopolize 
"  any  part "  of  such  trade  or  commerce.  Let  me  refer  to  a  few 
other  cases  in  which  the  scope  of  the  decision  in  the  Freight 
Association  case  was  referred  to. 

After  what  has  been  adjudged,  upon  full  consideration,  as  to 
the  meaning  and  scope  of  the  anti-trust  act,  and  in  view  of  the 
usages  of  this  court  when  attorneys  for  litigants  have  attempted 
to  reopen  questions  that  have  been  dehberately  decided,  I  con- 
fess to  no  little  surprise  as  to  what  has  occurred  in  the  present 
case.  The  court  says  that  the  previous  cases,  above  cited,  "can- 
not by  any  possible  conception  be  treated  as  authoritative  with- 
out the  certitude  that  reason  was  resorted  to  for  the  purpose  of 
deciding  them."  And  its  opinion  is  full  of  intimations  that  this 
court  proceeded  in  those  cases,  so  far  as  the  present  question  is 
concerned,  without  being  guided  by  the  "  rule  of  reason "  or 
"  the  light  of  reason."  It  is  more  than  once  intimated,  if  not  sug- 
gested, that  if  the  anti-trust  act  is  to  be  construed  as  prohibiting 
every  contract  or  combination,  of  whatever  nature,  which  is  in 
fact  in  restraint  of  commerce,  regardless  of  the  reasonableness 
or  unreasonableness  of  such  restraint,  that  fact  would  show  that 
the  court  had  not  proceeded,  in  its  decision,  according  to  "  the 
light  of  reason,"  but  had  disregarded  the  "  rule  of  reason."  If 
the  court,  in  those  cases,  was  wrong  in  its  construction  of  the 


DEFINITIVE   ANTI-TRUST   LAW   INTERPRK  lATION      587 

act,  it  is  certain  that  it  fully  apprehended  the  views  aidranced  by 
learned  counsel  in  previous  cases  and  pronounced  them  to  be 
untenable.  The  published  reports  place  this  beyond  all  question. 
The  opinion  of  the  court  was  delivered  by  a  justice  of  wide  ex- 
perience as  a  judicial  officer,  and  the  court  had  before  it  the 
Attorney-General  of  the  United  States  and  lawyers  who  were 
recognized,  on  all  sides,  as  great  leaders  in  their  profession. 
The  same  eminent  jurist  who  delivered  the  opinion  in  the  Trans- 
Missouri  case  delivered  the  opinion  in  the  Joint  Traffic  case, 
while  the  association  in  the  latter  case  was  represented  by 
lawyers  whose  ability  was  universally  recognized.  Is  it  to  be 
supposed  that  any  point  escaped  notice  in  those  cases  when  we 
think  of  the  sagacity  of  the  justice  who  expressed  the  views  of 
the  court,  or  of  the  ability  of  the  profound,  astute  lawyers  who 
sought  such  an  interpretation  of  the  act  as  would  compel  the 
court  to  insert  words  in  the  statute  which  Congress  had  not  put 
there,  and  the  insertion  of  which  words  would  amount  to  "judi- 
cial legislation  "  ?  Now  this  court  is  asked  to  do  that  which  it 
has  distinctly  declared  it  could  not  and  would  not  do,  and  has 
now  done  what  it  then  said  it  could  not  constitutionally  do.  It 
has,  by  mere  interpretation,  modified  the  act  of  Congress,  and 
deprived  it  of  practical  value  as  a  defensive  measure  against  the 
evils  to  be  remedied.  On  reading  the  opinion  just  delivered,  the 
first  inquiry  will  be,  that  as  the  court  is  unanimous  in  holding 
that  the  particular  things  done  by  the  Standard  Oil  Company 
and  its  subsidiary  companies,  in  this  case,  were  illegal  under  the 
anti-trust  act,  whether  those  things  were  in  reasonable  or  un- 
reasonable restraint  of  interstate  commerce,  why  was  it  necessary 
to  make  an  elaborate  argument,  as  is  done  in  the  opinion,  to 
show  that  according  to  the  "rule  of  reason"  the  act  as  passed 
by  Congress  should  be  interpreted  as  if  it  contained  the  word 
"  unreasonable  "  or  the  word  "  undue  "  .-'  The  only  answer  which, 
in  frankness,  can  be  given  to  this  question,  is,  that  the  court  in- 
tends to  decide  that  its  deliberate  judgment,  fifteen  years  ago, 
to  the  effect  that  the  act  permitted  no  restraint  whatever  of  in- 
terstate commerce,  whether  reasonable  or  unreasonable,  was  not 
in  accordance  with  the  "  rule  of  reason."  In  effect  the  court 
says  that  it  will  now,  for  the  first  time,  bring  the  discussion 


588  TRUSTS,    POOLS   AND  CORPORATIONS 

under  the  "  light  of  reason,"  and  apply  the  "  rule  of  reason"  to 
the  questions  to  be  decided.  I  have  the  authority  of  this  court 
for  saying  that  such  a  course  of  proceeding  on  its  part  would  be 
"  judicial  legislation." 

Still  more,  what  is  now  done  involves  a  serious  departure  from 
the  settled  usages  of  this  court.  Counsel  have  not  ordinarily 
been  allowed  to  discuss  questions  already  settled  by  previous 
decisions.  When  counsel  in  the  present  case  insisted  upon  a 
reversal  of  the  former  rulings  of  this  court,  and  asked  such  an 
interpretation  of  the  anti-trust  act,  as  would  allow  reasonable  re- 
straints of  interstate  commerce,  this  court,  in  deference  to  es- 
tablished practice,  should,  I  submit,  have  said  to  them  :  "  That 
question,  according  to  our  practice,  is  not  open  for  further  dis- 
cussion here.  This  court  long  ago  deliberately  held  (i)  that  the 
act,  interpreting  its  words  in  their  ordinary  acceptation,  prohibits 
all  restraints  of  interstate  commerce  by  combinations  in  what- 
ever form,  and  whether  reasonable  or  unreasonable;  (2)  the 
question  relates  to  matters  of  public  policy  in  reference  to  com- 
merce among  the  states  and  with  foreign  nations,  and  Congress 
alone  can  deal  with  the  subject;  (3)  this  court  would  encroach 
upon  the  authority  of  Congress  if,  under  the  guise  of  construc- 
tion, it  should  assume  to  determine  a  matter  of  public  policy ; 
(4)  the  parties  must  go  to  Congress  and  obtain  an  amendment  of 
the  anti-trust  act  if  they  think  this  court  was  wrong  in  its  former 
decisions;  and  (5)  this  court  cannot  and  will  noX.  judicially  legis- 
late, since  its  function  is  to  declare  the  law,  while  it  belongs  to 
the  legislative  department  to  make  the  law."  Such  a  course,  I 
am  sure,  would  not  have  offended  the  "  rule  of  reason." 

But  my  brethren,  in  their  wisdom,  have  deemed  it  best  to 
pursue  a  different  course.  They  have  now  said  to  those  who 
condemn  our  former  decisions  and  who  object  to  all  legislative 
prohibitions  of  contracts,  combinations,  and  trusts  in  restraint  of 
interstate  commerce,  "You  may  7iow  restrain  such  commerce, 
provided  you  are  reasonable  about  it ;  only  take  care  that  the 
restraint  is  not  undue."  The  disposition  of  the  case  under  con- 
sideration, according  to  the  views  of  the  defendants,  will,  it  is 
claimed,  quiet  and  give  rest  to  "the  business  of  the  country." 
On  the  contrary,  I  have  a  strong  conviction  that  it  will  throw 


DEFINITIVE    ANTI-TRUST    LAW    IXTERI'RETATION      589 

the  business  of  the  country  into  confusion  and  iiiiiUe  widely- 
extended  and  harassing  Htigation,  the  injurious  effects  of  which 
will  be  felt  for  many  years  to  come.  When  Congress  prohibited 
every  contract,  combination,  or  monopoly,  in  restraint  of  coni- 
merce,  it  prescribed  a  simple,  definite  rule  that  all  could  under- 
stand, and  which  could  be  easily  applied  by  every  one  wishing  to 
obey  the  law,  and  not  to  conduct  their  business  in  violation  of 
law.  Ikit  now,  it  is  to  be  feared,  we  are  to  have,  in  cases  with- 
out number,  the  constantly  recurring  inquiry  —  difficult  to  solve 
by  proof  —  whether  the  particular  contract,  combination,  or  trust 
involved  in  each  case  is  or  is  not  an  "  unreasonable  "  or  "  undue" 
restraint  of  trade.  Congress,  in  effect,  said  that  there  should 
be  no  restraint  of  trade  /;/  any  form,  and  this  court  solemnly  ad- 
judged many  years  ago  that  Congress  meant  what  it  thus  said  in 
clear  and  explicit  words,  and  that  it  could  not  add  to  the  words  of 
the  act.  But  those  who  condemn  the  action  of  Congress  are  now^, 
in  effect,  informed  that  the  courts  will  allow  such  restraint  of  inter- 
state commerce  as  are  shown  not  to  be  unreasonable  or  undue. 
It  remains  for  me  to  refer,  more  fully  than  I  have  heretofore 
done,  to  another,  and,  in  my  judgment,  — if  we  look  to  the  future, 
—  the  most  important,  aspect  of  this  case.  That  aspect  concerns 
the  usurpation  by  the  judicial  branch  of  the  government  of  the 
functions  of  the  legislative  department.  The  illustrious  men  who 
laid  the  foundations  of  our  institutions  deemed  no  part  of  the 
national  Constitution  of  more  consequence  or  more  essential  to 
the  permanency  of  our  form  of  government  than  the  provisions 
under  which  were  distributed  the  powers  of  government  among 
three  separate,  equal,  and  coordinate  departments,  —  legislative, 
executive,  and  judicial.  This  was  at  that  time  a  new  feature  of 
governmental  regulation  among  the  nations  of  the  earth,  and  it  is 
deemed  by  the  people  of  every  section  of  our  own  country  as 
most  vital  in  the  workings  of  a  rcpiesentative  republic  whose 
Constitution  was  ordained  and  established  in  order  to  accomphsh 
the  objects  stated  in  its  Preamble  by  the  means,  but  only  by  the 
■means,  provided,  cither  expressly  or  by  necessary  implication, 
by  the  instrument  itself.  No  department  of  that  government 
can  constitutionally  exercise  the  powers  committed  strictly  to 
another  and  separate  department. 


590  TRUSTS,    POOLS   AND    CORPORATIONS 

I  said  at  the  outset  that  the  action  of  the  court  in  this  case 
might  well  alarm  thoughtful  men  who  revered  the  Constitution. 
I  meant  by  this  that  many  things  are  intimated  and  said  in  the 
court's  opinion  which  will  not  be  regarded  otherwise  than  as 
sanctioning  an  invasion  by  the  judiciary  of  the  constitutional 
domain  of  Congress,  —  an  attempt  by  interpretation  to  soften  or 
modify  what  some  regard  as  a  harsh  public  policy.  This  court, 
let  me  repeat,  solemnly  adjudged  many  years  ago  that  it  could 
not,  except  by  ''judical  legislation,''  read  words  into  the  anti- 
trust act  not  put  there  by  Congress,  and  which,  being  inserted, 
gives  it  a  meaning  which  the  words  of  the  act,  as  passed,  if 
properly  interpreted,  would  not  justify.  The  court  has  decided 
that  it  could  not  thus  change  a  public  policy  formulated  and  de- 
clared by  Congress  ;  that  Congress  has  paramount  authority  to 
regulate  interstate  commerce,  and  that  it  alone  can  change  a 
policy  once  inaugurated  by  legislation.  The  courts  have  nothing 
to  do  with  the  wisdom  or  policy  of  an  act  of  Congress.  Their 
duty  is  to  ascertain  the  will  of  Congress,  and  if  the  statute  em- 
bodying the  expression  of  that  will  is  constitutional,  the  courts 
must  respect  it.  They  have  no  function  to  declare  a  public  policy, 
nor  to  amend  legislative  enactments.  "  What  is  termed  the  policy 
of  the  government  with  reference  to  any  particular  legislation," 
as  this  court  has  said,  "is  generally  a  very  uncertain  thing,  upon 
which  all  sorts  of  opinions,  each  variant  from  the  other,  may  be 
formed  by  different  persons.  It  is  a  ground  much  too  unstable 
upon  which  to  rest  the  judgment  of  the  court  in  the  interpreta- 
tion of  statutes."  Hadden  v.  The  Collector  {Haddcnv.  Batirey), 
5  Wall.  107,  18  L.  ed.  518.  Nevertheless,  if  I  do  not  misappre- 
hend its  opinion,  the  court  has  now  read  into  the  act  of  Congress 
words  which  are  not  to  be  found  there,  and  has  thereby  done  that 
which  it  adjudged  in  1896  and  1898  could  not  be  done  without  vio- 
lating the  Constitution  ;  namely,  by  interpretation  of  a  statute 
changed  a  public  policy  declared  by  the  legislative  department. 

After  many  years  of  public  service  at  the  national  capital,  arid 
after  a  somewhat  close  observation  of  the  conduct  of  public 
affairs,  I  am  impelled  to  say  that  there  is  abroad  in  our  land  a 
most  harmful  tendency  to  bring  about  the  amending  of  constitu- 
tions and  legislative  enactments  by  means  alone  of  judicial  con- 


DEFINITIVE   ANTI-TRUSr   LAW    INTERPRETATION      591 

struction.  As  a  public  policy  has  been  declared  by  tha4€gishitive 
department  in  respect  of  interstate  commerce,  over  which  Con- 
gress has  entire  control,  under  the  Constitution,  all  concerned 
must  patiently  submit  to  what  has  been  lawfully  done,  until  the 
people  of  the  United  States  —  the  source  of  all  national  power  — 
shall,  in  their  own  time,  upon  reflection  and  through  the  legisla- 
tive department  of  the  government,  require  a  change  of  that 
policy.  There  are  some  who  say  that  it  is  a  part  of  one's  liberty 
to  conduct  commerce  among  the  states  without  being  subject  to 
governmental  authority.  But  that  would  not  be  liberty  regulated 
by  law,  and  liberty  which  cannot  be  regulated  by  law  is  not  to 
be  desired.  The  supreme  law  of  the  land,  which  is  binding  alike 
upon  all,  —  upon  Presidents,  Congresses,  the  courts  and  the 
people,  —  gives  to  Congress,  and  to  Congress  alone,  authority  to 
regulate  interstate  commerce,  and  when  Congress  forbids  a7iy 
restraint  of  such  commerce,  in  any  form,  all  must  obey  its  man- 
date. To  overreach  the  action  of  Congress  merely  by  judicial 
construction,  that  is,  by  indirection,  is  a  blow  at  the  integrity  of 
our  governmental  system,  and  in  the  end  will  prove  most 
dangerous  to  all.  Mr.  Justice  Bradley  wisely  said,  when  on  this 
bench,  that  illegitimate  and  unconstitutional  practices  get  their 
first  footing  by  silent  approaches  and  slight  deviations  from  legal 
modes  of  legal  procedure.  "VVe  shall  do  well  to  heed  the  warn- 
ings of  that  great  jurist. 

I  do  not  stop  to  discuss  the  merits  of  the  policy  embodied  in 
the  anti-trust  act  of  1890;  for,  as  has  been  often  adjudged,  the 
courts,  under  our  constitutional  system,  have  no  rightful  concern 
with  the  wisdom  or  policy  of  legislation  enacted  by  that  branch 
of  the  government  which  alone  can  make  laws. 

For  the  reasons  stated,  while  concurring  in  the  general  aflfirm- 
ance  of  the  decree  of  the  Circuit  Court,  I  dissent  from  that 
part  of  the  judgment  of  this  court  which  directs  the  modification 
of  the  decree  of  the  Circuit  Court,  as  well  as  from  those  parts 
of  the  opinion  which,  in  effect,  assert  authority  in  this  court  to 
insert  words  in  the  anti-trust  act  which  Congress  did  not  put 
there,  and  which,  being  inserted,  Congress  is  made  to  declare, 
as  part  of  the  public  policy  of  the  country,  what  it  has  not 
chosen  to  declare. 


592  TRUSTS,    POOLS    AND    CORPORATIONS 

THE    TOBACCO    COMPANY   CASE^ 

Mr.  Chief  Justice  White  delivered  the  opinion  of  the  court : 

We  shall  divide  our  investigation  of  the  case  into  three  sub- 
jects :  First,  the  undisputed  facts ;  second,  the  meaning  of  the 
anti-trust  law,  and  its  application,  as  correctly  construed,  to  the 
ultimate  conclusions  of  fact  deducible  from  the  proof ;  third, 
the  remedies  to  be  applied. 

First.  Undisputed  facts.  [Practically  a  repetition  of  Chapter 
VIII,  supra.'] 

The  construction  and  application  of  the  anti-trust  act. 

If  the  anti-trust  law  is  applicable  to  the  entire  situation  here 
presented,  and  is  adequate  to  afford  complete  relief  for  the  evils 
which  the  United  States  insists  that  situation  presents,  it  can 
only  be  because  that  law  will  be  given  a  more  comprehensive 
application  than  has  been  affixed  to  it  in  any  previous  decision. 
This  will  be  the  case  because  the  undisputed  facts  as  we  have 
stated  them  involve  questions  as  to  the  operation  of  the  anti-trust 
law  not  hitherto  presented  in  any  case.  Thus,  even  if  the  owner- 
ship of  stock  by  the  American  Tobacco  Company  in  the  accessory 
and  subsidiary  companies,  and  the  ownership  of  stock  in  any  of 
those  companies  among  themselves,  were  held,  as  was  decided 
in  the  Standard  Oil  Company  case,  to  be  a  violation  of  the  act, 
and  all  relations  resulting  from  such  stock  ownership  were  there- 
fore set  aside,  the  question  would  yet  remain  whether  the  prin- 
cipal defendant,  the  American  Tobacco  Company,  and  the  five 
accessory  defendants,  even  when  devested  of  their  stock  owner- 
ship in  other  corporations,  by  virtue  of  the  power  which  they 
would  continue  to  possess,  even  although  thus  stripped,  would 
amount  to  a  violation  of  both  the  ist  and  2d  sections  of  the  act. 
Again,  if  it  were  held  that  the  corporation,  the  existence  whereof 
was  due  to  a  combination  between  such  companies  and  other 
companies,  was  a  violation  of  the  act,  the  question  would  remain 
whether  such  of  the  companies  as  did  not  owe  their  existence 
and  power  to  combinations,  but  whose  power  alone  arose  from 

1  U.  S.  V.  American  Tobacco  Co.  etc.;  31  Supreme  Court  Rep.  632;  221  U.  S. 
Rep.  181;  decided  May  29,  191 1.  Many  citations  are  omitted  without  indication 
and  the  opinion  is  greatly  abridged.  The  economic  facts  are  given  in  Chapter  VIII, 
supra. 


DEFINITIVE   ANTI-TRUST   LAW    INTERPRETATION     593 

the  exercise  of  the  right  to  acquire  and  own  propertyT^would  be 
amenable  to  the  prohibitions  of  the  act.  Yet  further :  Even  if 
this  proposition  was  held  in  the  affirmative,  the  question  would 
remain  whether  the  principal  defendant,  the  American  Tobacco 
Company,  when  stripped  of  its  stock  ownership,  would  be,  in 
and  of  itself,  within  the  prohibitions  of  the  act,  although  that 
company  was  organized  and  took  being  before  the  anti-trust  act 
was  passed.  Still  further,  the  question  would  yet  remain  whether 
particular  corporations  which,  when  bereft  of  the  power  which 
they  possessed  as  resulting  from  stock  ownership,  although  they 
were  not  inherently  possessed  of  a  sufficient  residuum  of  power 
to  cause  them  to  be,  in  and  of  themselves,  either  a  restraint  of 
trade  or  a  monopolization  or  an  attempt  to  monopolize,  should 
nevertheless  be  restrained  because  of  their  intimate  connection 
and  association  with  other  corporations  found  to  be  within  the 
prohibitions  of  the  act.  The  necessity  of  relief  as  to  all  these 
aspects,  we  think,  seemed  to  the  government  so  essential,  and 
the  difficulty  of  giving  to  the  act  such  a  comprehensive  and 
coherent  construction  as  would  be  adequate  to  enable  it  to  meet 
the  entire  situation,  led  to  what  appears  to  us  to  be  in  their 
essence  a  resort  to  methods  of  construction  not  compatible  one 
with  the  other.  And  the  same  apparent  conflict  is  presented  by 
the  views  of  the  act  taken  by  the  defendants  when  their  con- 
tentions are  accurately  tested.  Thus,  the  government,  for  the 
purpose  of  fixing  the  illegal  character  of  the  original  combinations 
which  organized  the  old  American  Tobacco  Company,  asserts 
that  the  illegal  character  of  the  combination  is  plainly  shown 
because  the  combination  was  brought  about  to  stay  the  progress 
of  a  flagrant  and  ruinous  trade  war.  In  other  words,  the  con- 
tention is  that,  as  the  act  forbids  every  contract  and  combination, 
it  hence  prohibits  a  reasonable  and  just  ngreement  made  for  the 
purpose  of  ending  a  trade  war.  But,  as  thus  construing  the  act 
by  the  rule  of  the  letter  which  kills  would  necessarily  operate  to 
take  out  of  the  reach  of  the  act  some  of  the  accessory  and  many 
subsidiary  corporations,  the  existence  of  which  depends  not  at 
all  upon  combination  or  agreement  or  contract,  but  upon  mere 
purchasers  of  property,  it  is  insisted  in  many  forms  of  argument 
that  the  rule  of  construction  to  be  applied  must  be  the  spirit  and 


594  TRUSTS,   POOLS  AND   CORPORATIONS 

intent  of  the  act,  and  therefore  its  prohibitions  must  be  held  to 
extend  to  acts  even  if  not  within  the  literal  terms  of  the  statute, 
if  they  are  within  its  spirit,  because  done  with  an  intent  to  bring 
about  the  harmful  results  which  it  was  the  purpose  of  the  statute 
to  prohibit.  So  as  to  the  defendants.  While  it  is  argued  on  the 
one  hand  that  the  forms  by  which  various  properties  were 
acquired,  in  view  of  the  letter  of  the  act,  exclude  many  of  the 
assailed  transactions  from  condemnation,  it  is  yet  urged  that, 
giving  to  the  act  the  broad  construction  which  it  should  right- 
fully receive,  whatever  may  be  the  form,  no  condemnation  should 
follow,  because,  looking  at  the  case  as  a  whole,  every  act  assailed 
is  shown  to  have  been  but  a  legitimate  and  lawful  result  of  the 
exertion  of  honest  business  methods,  brought  into  play  for  the 
purpose  of  advancing  trade,  instead  of  with  the  object  of  obstruct- 
ing and  restraining  the  same.  But  the  difficulties  which  arise 
from  the  complexity  of  the  particular  dealings  which  are  here 
involved  and  the  situation  which  they  produce,  we  think  grows 
out  of  a  plain  misconception  of  both  the  letter  and  spirit  of  the 
anti-trust  act.  We  say  of  the  letter,  because,  while  seeking  by 
a  narrow  rule  of  the  letter  to  include  things  which  it  is  deemed 
would  otherwise  be  excluded,  the  contention  really  destroys  the 
great  purpose  of  the  act,  since  it  renders  it  impossible  to  apply  the 
law  to  a  multitude  of  wrongful  acts  which  would  come  within  the 
scope  of  its  remedial  purposes  by  resort  to  a  reasonable  con- 
struction, although  they  would  not  be  within  its  reach  by  a  too 
narrow  and  unreasonable  adherence  to  the  strict  letter.  This 
must  be  the  case,  unless  it  be  possible  in  reason  to  say  that,  for 
the  purpose  of  including  one  class  of  acts  which  would  not  other- 
wise be  embraced,  a  literal  construction,  although  in  conflict 
witt  reason,  must  be  applied,  and  for  the  purpose  of  including 
other  acts  which  would  not  otherwise  be  embraced,  a  reasonable 
construction  must  be  resorted  to.  That  is  to  say,  two  conflicting 
rules  of  construction  must  at  one  and  the  same  time  be  applied 
and  adhered  to. 

The  obscurity  and  resulting  uncertainty,  however,  are  now 
but  an  abstraction,  because  it  has  been  removed  by  the  consid- 
eration which  we  have  given  quite  recently  to  the  construction 
of  the  anti-trust  act  in  the  Standard  Oil  case. 


DEFINITIVE   ANTI-TRUST    LAW    INTERPRETATION      595 

Coming,  then,  to  apply  to  the  case  before  usUJie  aet  as 
interpreted  in  the  Standard  Oil  and  previous  cases,  all  the 
difficulties  suggested  by  the  mere  form  in  which  the  assailed 
transactions  are  clothed  become  of  no  moment.  This  follows 
because,  although  it  was  held  in  the  Standard  Oil  case  that, 
giving  to  the  statute  a  reasonable  construction,  the  words  "  re- 
straint of  trade  "  did  not  embrace  all  those  normal  and  usual 
contracts  essential  to  individual  freedom,  and  the  right  to  make 
which  was  necessary  in  order  that  the  course  of  trade  might  be 
free,  yet,  as  a  result  of  the  reasonable  construction  which  was 
affixed  to  the  statute,  it  was  pointed  out  that  the  generic  designa- 
tion of  the  1st  and  2d  sections  of  the  law,  when  taken  together, 
embraced  every  conceivable  act  which  could  possibly  come 
within  the  spirit  or  purpose  of  the  prohibitions  of  the  law,  with- 
out regard  to  the  garb  in  which  such  acts  were  clothed.  That 
is  to  say,  it  was  held  that,  in  view  of  the  general  language  of  the 
statute  and  the  public  policy  which  it  manifested,  there  was 
no  possibility  of  frustrating  that  policy  by  resorting  to  any  dis- 
guise or  subterfuge  of  form,  since  resort  to  reason  rendered  it 
impossible  to  escape,  by  any  indirection,  the  prohibitions  of  the 
statute. 

Considering,  then,  the  undisputed  facts  which  we  have  previ- 
ously stated,  it  remains  only  to  determine  whether  they  establish 
that  the  acts,  contracts,  agreements,  combinations,  etc.,  which 
were  assailed,  were  of  such  an  unusual  and  wrongful  character  as 
to  bring  them  within  the  prohibitions  of  the  law.  That  they 
were,  in  our  opinion  so  overwhelmingly  results  from  the  undis- 
puted facts  that  it  seems  only  necessary  to  refer  to  the  facts  as 
we  have  stated  them  to  demonstrate  the  correctness  of  this  con- 
clusion. Indeed,  the  history  of  the  combination  is  so  replete 
with  the  doing  of  acts  which  it  was  the  obvious  purpose  of  the 
statute  to  forbid,  so  demonstrative  of  the  existence  from  the  be- 
ginning of  a  purpose  to  acquire  dominion  and  control  of  the 
tobacco  trade,  not  by  the  mere  exertion  of  the  ordinary  right  to 
contract  and  to  trade,  but  by  methods  devised  in  order  to  mo- 
nopolize the  trade  by  driving  competitors  out  of  business,  which 
were  ruthlessly  carried  out  upon  the  assumption  that  to  work 
upon  the  fears  or  play  upon  the  cupidity  of  competitors  would 


596  TRUSTS,   POOLS  AND   CORPORATIONS 

make  success  possible.  We  say  these  conclusions  are  inevitable, 
not  because  of  the  vast  amount  of  property  aggregated  by  the 
combination,  not  because,  alone,  of  the  many  corporations  which 
the  proof  shows  were  united  by  resort  to  one  device  or  another. 
Again,  not  alone  because  of  the  dominion  and  control  over  the 
tobacco  trade  which  actually  exists,  but  because  we  think  the 
conclusion  of  wrongful  purpose  and  illegal  combination  is  over- 
whelmingly established  by  the  following  considerations:  (a)  By 
the  fact  that  the  very  first  organization  or  combination  was 
impelled  by  a  previously  existing  fierce  trade  war,  evidently 
inspired  by  one  or  more  of  the  minds  which  brought  about  and 
became  parties  to  that  combination,  (d)  Because,  immediately 
after  that  combination  and  the  increase  of  capital  which  followed, 
the  acts  which  ensued  justify  the  inference  that  the  intention 
existed  to  use  the  power  of  the  combination  as  a  vantage  ground 
to  further  monopolize  the  trade  in  tobacco  by  means  of  trade 
conflicts  designed  to  injure  others,  either  by  driving  competitors 
out  of  the  business  or  compelling  them  to  become  parties  to  a 
combination,  —  a  purpose  whose  execution  was  illustrated  by  the 
plug  war  which  ensued  and  its  results,  by  the  snuff  war  which 
followed  and  its  results,  and  by  the  conflict  which  immediately 
followed  the  entry  of  the  combination  in  England,  and  the  divi- 
sion of  the  world's  business  by  the  two  foreign  contracts  which 
ensued,  (r)  By  the  ever-present  manifestation  which  is  exhib- 
ited of  a  conscious  wrongdoing  by  the  form  in  which  the  various 
transactions  were  embodied  from  the  beginning,  ever  changing, 
but  ever  in  substance  the  same.  Now  the  organization  of  a  new 
company,  now  the  control  exerted  by  the  taking  of  stock  in  one 
or  another  or  in  several,  so  as  to  obscure  the  result  actually 
attained,  nevertheless  uniform,  in  their  manifestations  of  the 
purpose  to  restrain  others  and  to  monopolize  and  retain  power 
in  the  hands  of  the  few  who,  it  would  seem,  from  the  beginning, 
contemplated  the  mastery  of  the  trade  which  practically  followed. 
(d)  By  the  gradual  absorption  of  control  over  ail  the  elements 
essential  to  the  successful  manufacture  of  tobacco  products,  and 
placing  such  control  in  the  hands  of  seemingly  independent  cor- 
porations serving  as  perpetual  barriers  to  the  entry  of  others 
into  the  tobacco  trade,     (r)  By  persistent  expenditure  of  millions 


DEFINITIVE   ANTI-TRUST    LAW    INTERPRETATION     597 

upon  millions  of  dollars  in  buying  out  plants,  not  4er  the  pur- 
pose of  utilizing  them,  but  in  order  to  close  them  up  and  render 
them  useless  for  the  purposes  of  trade.  (/)  By  the  constantly 
recurring  stipulations,  whose  legality,  isolatedly  viewed,  we  are 
not  considering,  by  which  numbers  of  persons,  whether  manu- 
facturers, stockholders,  or  employees,  were  required  to  bind 
themselves,  generally  for  long  periods,  not  to  compete  in  the 
future.  Indeed,  when  the  results  of  the  undisputed  proof  which 
we  have  stated  are  fully  apprehended,  and  the  wrongful  acts 
which  they  exhibit  are  considered,  there  comes  inevitably  to  the 
mind  the  conviction  that  it  was  the  danger  which  it  was  deemed 
would  arise  to  individual  liberty  and  the  public  well-being  from 
acts  hke  those  which  this  record  exhibits,  which  led  the  legisla- 
tive mind  to  conceive  and  to  enact  the  anti-trust  act,  —  consid- 
erations which  also  serve  so  clearly  to  demonstrate  that  the 
combination  here  assailed  is  within  the  law  as  to  leave  no  doubt 
that  it  is  our  plain  duty  to  apply  its  prohibitions. 

In  stating  summarily,  as  we  have  done,  the  conclusions  which, 
in  our  opinion,-  are  plainly  deducible  from  the  undisputed  facts, 
we  have  not  paused  to  give  the  reasons  why  we  consider,  after 
great  consideration,  that  the  elaborate  arguments  advanced  to 
affix  a  different  complexion  to  the  case  are  wholly  devoid  of 
merit.  We  do  not,  for  the  sake  of  brevity,  moreover,  stop  to 
examine  and  discuss  the  various  propositions  urged  in  the 
argument  at  bar  for  the  purpose  of  demonstrating  that  the  sub- 
ject matter  of  the  combination  which  we  find  to  exist,  and  the 
combination  itself,  are  not  within  the  scope  of  the  anti-trust  law, 
because,  when  rightly  considered,  they  are  merely  matters  of 
intrastate  commerce,  and  therefore  subject  alone  to.state  control. 
We  have  done  this  because  the  want  of  merit  in  all  the  argu- 
ments advanced  on  such  subjects  is  so  completely  estabUshed  by 
the  prior  decisions  of  this  court,  as  pointed  out  in  the  Standard 
Oil  case,  as  not  to  require  restatement. 

Leading  as  this  does  to  the  conclusion  that  the  assailed  com- 
bination in  all  its  aspects  — that  is  to  say,  whether  it  be  looked 
at  from  the  point  of  view  of  stock  ownership  or  from  the  stand- 
point  of  the  principal  corporation  and  the  accessory  or  subsidiary 
corporations,  viewed  independently,  including  the  foreign  corpora- 


598  TRUSTS,    POOLS   AND    CORPORATIONS 

tions  in  so  far  as  by  the  contracts  made  by  them  they  became 
cooperators  in  the  combination  —  comes  within  the  prohibitions 
of  the  1st  and  2d  sections  of  the  anti-trust  act,  it  remains  only 
finally  to  consider  the  remedy  which  it  is  our  duty  to  apply  to 
the  situation  thus  found  to  exist. 

The  remedy. 

Our  conclusion  being  that  the  combination  as  a  whole,  involv- 
ing all  its  cooperating  or  associated  parts,  in  whatever  form 
clothed,  constitutes  a  restraint  of  trade  within  the  ist  section, 
and  an  attempt  to  monopolize  or  a  monopolization  within  the  2d 
section  of  the  anti-trust  act,  it  follows  that  the  relief  which  we 
are  to  afford  must  be  wider  than  that  awarded  by  the  lower 
courts,  since  that  court  merely  decided  that  certain  of  the  cor- 
porate defendants  constituted  combinations  in  violation  of  the 
I st  section  of  the  act,  because  of  the  fact  that  they  were  formed 
by  the  union  of  previously  competing  concerns,  and  that  the 
other  defendants  not  dismissed  from  the  action  were  parties  to 
such  combinations,  or  promoted  their  purposes.  We,  hence,  in 
determining  the  rehef  proper  to  be  given,  may  not  model  our 
action  upon  that  granted  by  the  court  below,  but,  in  order  to 
enable  us  to  award  relief  coterminous  with  the  ultimate  redress  of 
the  wrongs  which  we  find  to  exist,  we  must  approach  the  sub- 
ject of  relief  from  an  original  point  of  view. 

Under  these  circumstances,  taking  into  mind  the  complexity 
of  the  situation  in  all  of  its  aspects,  and  giving  weight  to  the 
many-sided  considerations  which  must  control  our  judgment, 
we  think,  so  far  as  the  permanent  relief  to  be  awarded  is  con- 
cerned, we  should  decree  as  follows:  ist.  That  the  combina- 
tion, in  and  of  itself,  as  well  as  each  and  all  of  the  elements 
composing  it,  whether  corporate  or  individual,  whether  consid- 
ered collectively  or  separately,  be  decreed  to  be  in  restraint  of 
trade  and  an  attempt  to  monopoHze  and  a  monopolization  within 
the  ist  and  2d  sections  of  the  anti-trust  act.  2d.  That  the  court 
below,  in  order  to  give  effective  force  to  our  decree  in  this 
regard,  be  directed  to  hear  the  parties,  by  evidence  or  otherwise, 
as  it  may  be  deemed  proper,  for  the  purpose  of  ascertaining 
and  determining  upon  some  plan  or  method  of  dissolving  the 
combination  and  of  recreating,  out  of  the  elements  now  com- 


DEFINITIVE   ANTI-TRUST   LAW  INTERPRETATION     599 

posing  it,  a  new  condition  which  shall  be  honestly  iu-harmony 
with  and  not  repugnant  to  the  law.  3d.  That  for  the  accom- 
plishment of  these  purposes,  taking  into  view  the  difficulty  of 
the  situation,  a  period  of  six  months  is  allowed  from  the  receipt 
of  our  mandate,  with  leave,  however,  in  the  event,  in  the  judg- 
ment of  the  court  below,  the  necessities  of  the  situation  require, 
to  extend  such  period  to  a  further  time  not  to  exceed  sixty  days. 
4th.  That  in  the  event,  before  the  expiration  of  the  period  thus 
fixed,  a  condition  of  disintegration  in  harmony  with  the  law  is 
not  brought  about,  either  as  the  consequence  of  the  action  of 
the  court  in  determining  an  issue  on  the  subject,  or  in  accepting 
a  plan  agreed  upon,  it  shall  be  the  duty  of  the  court,  either  by 
way  of  an  injunction  restraining  the  movement  of  the  products 
of  the  combination  in  the  channels  of  interstate  or  foreign  com- 
merce, or  by  the  appointment  of  a  receiver,  to  give  effect  to  the 
requirements  of  the  statute. 

Pending  the  bringing  about  of  the  result  just  stated,  each  and 
all  of  the  defendants,  individuals  as  well  as  corporations,  should 
be  restrained  from  doing  any  act  which  might  further  extend  or 
enlarge  the  power  of  the  combination,  by  any  means  or  device 
whatsoever.  In  view  of  the  considerations  we  have  stated,  we 
leave  the  matter  to  the  court  below  to  work  out  a  compliance 
with  the  law  without  unnecessary  injury  to  the  public  or  the 
rights  of  private  property. 

While  in  many  substantial  respects  our  conclusion  is  in  accord 
with  that  reached  by  the  court  below,  and  while  also  the  relief 
which  we  think  should  be  awarded  in  some  respects  is  coincident 
with  that  which  the  court  granted,  in  order  to  prevent  any  com- 
phcation,  and  to  clearly  define  the  situation,  we  think,  instead 
of  affirming  and  modifying,  our  decree,  in  view  of  the  broad 
nature  of  our  conclusions,  should  be  one  of  reversal  and  remand- 
ing, with  directions  to  the  court  below  to  enter  a  decree  in  con- 
formity with  this  opinion,  and  to  take  such  further  steps  as  may 
be  necessary  to  fully  carry  out  the  directions  which  we  have 
given. 

And  it  is  so  ordered. 

Mr.  Justice  Harlan  concurred  in  part  and  dissented  in  part  : 

I  concur  with  many  things  said  in  the  opinion  just  delivered 


6oo  TRUSTS,    POOLS   AND   CORPORATIONS 

for  the  court,  but  it  contains  some  observations  from  which  I 
am  compelled  to  withhold  my  assent. 

I  agree  most  thoroughly  with  the  court  in  holding  that  the 
principal  defendant,  the  American  Tobacco  Company,  and  its 
accessory  and  subsidiary  corporations  and  companies,  including 
the  defendant  English  corporations,  constitute  a  combination 
which,  "  in  and  of  itself,  as  well  as  each  and  all  of  the  elements 
composing  it,  whether  corporate  or  individual,  whether  con- 
sidered collectively  or  separately,"  is  illegal  under  the  anti-trust 
act  of  1890,  and  should  be  decreed  to  be  in  restraint  of  inter- 
state trade  and  an  attempt  to  monopolize  and  a  monopolization 
of  part  of  such  trade. 

The  evidence  in  the  record  is,  I  think,  abundant  to  enable  the 
court  to  render  a  decree  containing  all  necessary  details  for  the 
suppression  of  the  evils  of  the  combination  in  question.  But 
the  case  is  sent  back  with  directions  further  to  hear  the  parties, 
by  evidence  or  otherwise,  "  for  the  purpose  of  ascertaining  and 
determining  upon  some  plan  or  method  of  dissolving  the  com- 
bination, and  of  recreating  out  of  the  elements  nozu  composing 
it,  a  new  condition  "  which  shall  not  be  repugnant  to  law.  The 
court,  in  its  opinion,  says  of  the  present  combination  that  its 
illegal  purposes  are  overwhelmingly  established  by  many  facts  ; 
among  others,  "  by  the  ever-present  manifestation  which  is  ex- 
hibited of  a  conscions  wrongdoing  by  the  form  in  which  the 
various  transactions  were  embodied  from  the  beginning,  ever 
changing,  but  ever  in  substance  the  same.  Now  the  organiza- 
tion of  a  new  company,  now  the  control  exerted  by  the  taking 
of  stock  in  one  or  another,  or  in  several,  so  as  to  obscure  the 
result  actually  attained,  nevertheless  uniform  in  their  manifesta- 
tions of  the  purpose  to  restrain  others,  and  to  monopolize  and 
retain  power  in  the  hands  of  the  few,  who,  it  would  seem, 
from  the  beginning  contemplated  the  mastery  of  the  trade  which 
practically  followed.  By  the  gradual  absorption  of  control  over 
all  the  elements  essential  to  the  successful  manufacture  of 
tobacco  products,  and  placing  such  control  in  the  hands  of 
seemingly  independent  corporations,  serving  as  perpetual  bar- 
riers to  the  entry  of  others  into  the  tobacco  trade."  The  court 
further  says  of  this  combination  and  monopoly : 


DEFINITIVE   ANTI-TRUST   LAW    INTERPRETATION     60 1 

The  history  of  the  combination  is  so  replete  with  thc"tit)ing  of  acts 
which  it  was  the  obvious  purpose  of  the  statute  to  forbid,  so  demon- 
strative of  the  existence,  from  the  beginning,  of  a  purpose  to  acquire 
dominion  and  control  of  the  tobacco  trade,  not  by  the  mere  exertion 
of  the  ordinary  right  to  contract  and  to  trade,  but  by  methods  de- 
vised in  order  to  monopolize  the  trade,  by  driving  competitors  out  of 
business,  which  were  ruthlessly  carried  out,  upon  the  assumption  that 
to  work  upon  the  fears  or  play  upon  the  cupidity  of  competitors  would 
make  success  possible. 

But  it  seems  that  the  course  I  have  suggested  is  not  to  be  pur- 
sued. The  case  is  to  go  back  to  the  circuit  court  in  order  that, 
out  of  the  elements  of  the  old  combination,  a  new  condition  may- 
be "  re-created  "  that  will  not  be  in  violation  of  the  law.  I  con- 
fess ray  inability  to  find,  in  the  history  of  this  combination, 
anything  to  justify  the  wish  that  a  new  condition  should  be 
"  re-created  "  out  of  the  mischievous  elements  that  compose  the 
present  combination,  which,  together  with  its  component  parts, 
have,  without  ceasing,  pursued  the  vicious  methods  pointed  out 
by  the  court.  If  the  proof  before  us  —  as  it  undoubtedly  does  — 
warrants  the  characterization  which  the  court  has  made  of  this 
monster  combination,  why  cannot  all  necessary  directions  be 
now  given  as  to  the  terms  of  the  decree  ?  In  my  judgment, 
there  is  enough  in  the  record  to  enable  this  court  to  formulate 
specific  directions  as  to  what  the  decree  should  contain.  Such 
directions  would  not  only  end  this  litigation,  but  would  serve  to 
protect  the  public  against  any  more  conscious  wrongdoing  by 
those  who  have  persistently  and  "  ruthlessly,"  to  use  this  court's 
language,  pursued  illegal  methods  to  defeat  the  act  of  Congress. 

I  will  not  say  what,  in  my  opinion,  should  be  the  form  of  the 
decree,  nor  speculate  as  to  what  the  details  ought  to  be.  It  will 
be  time  enough  to  speak  on  that  subject  when  we  have  the 
decree  before  us.  I  will,  however,  say  now  that,  in  my  opinion, 
the  decree  below  should  be  afifirmed  as  to  the  tobacco  company 
and  its  accessory  and  subsidiary  companies,  and  reversed  on  the 
cross  appeal  of  the  government. 

But  my  objections  have  also  reference  to  those  parts  of  the 
court's  opinion  reaffirming  what  it  said  recently  in  the  Standard 
Oil  case,  about  the  former  decisions  of  this  court  touching  the 


6o2  TRUSTS,   POOLS  AND   CORPORATIONS 

anti-trust  act.  We  are  again  reminded,  as  we  were  in  the 
Standard  Oil  case,  of  the  necessity  of  applying  the  "rule  of 
reason"  in  the  construction  of  this  act  of  Congress, — ^an  act 
expressed,  as  I  think,  in  language  so  clear  and  simple  that  there 
is  no  room  whatever  for  construction. 

Congress,  with  full  and  exclusive  power  over  the  whole  sub- 
ject, has  signified  its  purpose  to  forbid  every  restraint  of  inter- 
state trade,  in  whatever  form,  or  to  whatever  extent ;  but  the 
court  has  assumed  to  insert  in  the  act,  by  construction  merely, 
words  which  made  Congress  say  that  it  means  only  to  prohibit 
the  "undue"  restraint  of  trade. 

If  I  do  not  misapprehend  the  opinion  just  delivered,  the  court 
insists  that  what  was  said  in  the  opinion  in  the  Standard  Oil 
case  was  in  accordance  with  our  previous  decisions  in  the  Trans- 
Missouri  and  Joint  Traffic  cases,  if  we  resort  to  reason.  This 
statement  surprises  me  quite  as  much  as  would  a  statement  that 
black  was  white  or  white  was  black.  It  is  scarcely  just  to  the 
majority  in  those  two  cases  for  the  court  at  this  late  day  to  say 
or  to  intimate  that  they  interpreted  the  act  of  Congress  without 
regard  to  the  "  rule  of  reason,"  or  to  assume,  as  the  court  now 
does,  that  the  act  was,  for  the  first  time,  in  the  Standard  Oil 
case,  interpreted  in  the  "  light  of  reason."  One  thing  is  certain, 
"rule  of  reason,"  to  which  the  court  refers,  does  not  justify  the 
perversion  of  the  plain  words  of  an  act  in  order  to  defeat  the 
will  of  Congress. 

By  every  conceivable  form  of  expression,  the  majority,  in  the 
Trans-Missouri  and  Joint  Traffic  cases,  adjudged  that  the  act 
of  Congress  did  not  allow  restraint  of  interstate  trade  to  any  ex- 
tent or  in  any  form,  and  three  times  it  expressly  rejected  the 
theory,  which  had  been  persistently  advanced,  that  the  act 
should  be  construed  as  if  it  had  in  it  the  word  "unreasonable" 
or  "  undue."  But  now  the  court,  in  accordance  with  what  it 
denominates  the  "  rule  of  reason,"  in  effect  inserts  in  the  act  the 
word  "undue,"  which  means  the  same  as  "unreasonable,"  and 
thereby  makes  Congress  say  what  it  did  not  say ;  what,  as  I 
think,  it  plainly  did  not  intend  to  say;  and  what,  since  the 
passage  of  the  act,  it  has  explicitly  refused  to  say.  It  has  stead- 
ily refused  to  amend  the  act  so  as  to  tolerate  a  restraint  of  in- 


DEFINITIVE   ANTI-TRUST   LAW    INTERPRETATION     603 

terstate  commerce  even  where  such  restraint  could^Be  said  to 
be  "reasonable  "  or  "  due."  In  short,  the  court  now,  by  judicial 
legislation,  in  effect  amends  an  act  of  Congress  relating  to  a 
subject  over  which  that  department  of  the  government  has  ex- 
clusively cognizance.  I  beg  to  say  that,  in  my  judgment,  the 
majority,  in  the  former  cases,  were  guided  by  the  "  rule  of  rea- 
son "  ;  for  it  may  be  assumed  that  they  knew  quite  as  well  as 
others  what  the  rules  of  reason  require  when  a  court  seeks  to 
ascertain  the  will  of  Congress  as  expressed  in  a  statute.  It  is 
obvious  from  the  opinions  in  the  former  cases,  that  the  majority 
did  not  grope  about  in  darkness,  but  in  discharging  the  solemn 
duty  put  on  them  they  stood  out  in  the  full  glare  of  the  "light 
of  reason,"  and  felt  and  said,  time  and  again,  that  the  court 
could  not,  consistently  with  the  Constitution,  and  would  not, 
usurp  the  functions  of  Congress  by  indulging  in  judicial  legisla- 
tion. They  said  in  express  words,  in  the  former  cases,  in  re- 
sponse to  the  earnest  contentions  of  counsel,  that  to  insert  by 
construction  the  word  "unreasonable"  or  "undue"  in  the  act 
of  Congress  would  be  judicial  legislation.  Let  me  say,  also, 
that  as  we  all  agree  that  the  combination  in  question  was  illegal 
under  any  construction  of  the  anti-trust  act,  there  was  not  the 
slightest  necessity  to  enter  upon  an  extended  argument  to  show 
that  the  act  of  Congress  was  to  be  read  as  if  it  contained  the 
word  "unreasonable"  or  "undue."  All  that  is  said  in  the 
court's  opinion  in  support  of  that  view  is,  I  say  with  respect, 
obiter  dicta,  pure  and  simple. 

For  the  reasons  stated,  I  concur  in  part  with  the  court's 
opinion  and  dissent  in  part.^ 

1  A  number  of  the  results  following  the  dissolution  are  detailed  herein  at  pp.  313 
ff.,  supra.  W.  S.  Stevens,  Industrial  Combinations  and  Trusts,  chapter  XIV,  reprints 
both  the  Standard  Oil  and  Tobacco  decrees  of  dissolution.  In  his  chapter  XV  he 
reprints  protests  of  independent  concerns  as  to  its  efficacy. 


XVIII 

THE   RULE   OF    REASON   APPLIED    CONCRETELY, 

1911-1915 

Two  groups  of  recent  Anti-Trust  law  cases  are  carried  over  as  a  legacy  from 
the  preceding  chapter  because  in  their  final  adjudication,  the  logical  conse- 
quences of  interpretation  according  to  the  rule  of  reason  are  peculiarly  appar- 
ent. These  are,  respectively,  those  cases  which  have  to  do  with  misuse  of 
the  patent  laws,  and  those  which  embody  unfair,  that  is  to  say  unsportsman- 
like, practices.  Instances  of  each  abound  in  the  period  preceding  191 1  ;  but 
they  mark  no  progress  in  the  unfolding  of  the  law.  It  is  only  after  the  clear 
cold  light  of  reason  has  once  been  turned  upon  them  in  the  Standard  Oil  de- 
cision, that  they  become  significantly  phosphorescent. 

Foremost  examples  of  prevented  misuse  of  the  patent  laws  are  found  in 
the  conviction  of  John  H.  Parks  in  1908,  who  was  fined  $50,000  for  organiz- 
ing a  patent  pool  in  the  paper  trade ;  and  in  the  condemnation,  with  penalties 
of  $128,700,  three  years  later  of  some  nine  patent  pools  in  the  electrical  manu- 
facturing business.  An  umbrella  frame  combination  in  1907,  the  bicycle 
coaster  brake  prosecutions  in  1912-1913,  and  the  clothes  wringer  agreement  the 
following  year,  alike  resemble  in  principle  the  Bathtub  case  of  191 3  which 
is  reported  first  in  this  chapter.  Heavy  fines  were  imposed  in  each  instance 
and  the  pool  was  compelled  to  disband.  Akin  to  this  class  of  cases,  but 
rather  more  technical  in  interpretation,  in  the  light  of  public  interest  is  the 
first  United  Shoe  Machinery  Company  decision  of  1914.  The  lower  Federal 
court  found  sufficient  justification  for  the  monopoly  in  the  patent  laws  even 
to  overlook  what  otherwise  and  elsewhere  would  have  been  condemned  as 
unfair  practice  in  making  exclusive  agreements  contrary  to  the  public  interest. 
On  the  other  hand,  in  the  electric  lamp  pool  between  the  General  Electric 
and  Westinghouse  companies  in  191 1,  the  courts  found  such  elements  of 
public  menace  as  to  cause  it  to  be  unqualifiedly  condemned.^  The  Kodak 
and  motion  picture  company  cases,  now  pending.'-  still  further  illustrate  the 
confusing  character  of  combinations,  supported  on  the  one  side  by  the  public 

1  Cf.  Stevens  in  the  Quarterly  Journal  of  Econotnics,  Vol.  XXVI,  191 2,  pp. 
594-602;    as  also  Industrial  Combinations  and  Trusts,  pp.  248  and  316. 

2  These,  just  decided,  are  discussed  in  the  Introduction  to  this  volume. 

604 


THE    BATirrUP>    CASE  605 

necessity  of  protecting  inventive  ability,  while  yet  disapproved-*cm  the  other 
because  of  oppressive  trade  practices  which  tend  to  stifle  opportunity  for 
others. 

Space  does  not  permit  of  a  description  of  all  of  the  unfair  practices  which 
have  been  disclosed  in  these  anti-monopoly  cases. 1  But  three  of  the  opinions 
reprinted  in  this  chapter,  namely  the  Bathtub,  the  Keystone  Watch  and  the 
Cash  Register  cases,  serve  to  show  why  the  legislation  of  1914  amending  the 
Slierman  Act  came  to  be  imperatively  demanded  by  an  outraged  public 
opinion.  The  fundamental  point  at  issue  in  this  group  of  offences  is  not 
merely  the  immediately  evil  and  oppressive  effect  of  such  unfair  tactics  as 
espionage,  intimidation,  local  price  cutting  and  the  like  ;  but  whether  in  entire 
absence  of  such  practices,  the  inherent  economies  of  monopolistic  or  even 
sometimes  only  of  very  large  scale  production,  are  sufficient  to  perpetuate 
combination  in  the  face  of  alert  and  active  competition.  The  .success  of  such 
concerns  as  the  International  Harvester  Company  and  the  U.  S.  Steel  Cor- 
poration prove  that  "big"  business  is  not  necessarily  unfair  business.  But 
the  puzzling  question  then  remains  as  to  whether  size  and  power,  per  se,  even 
when  avowedly  handled  foirly,  still  contain  within  themselves  such  seeds  of 
danger,  as  to  warrant  judicial  condemnation.  This  is  the  problem  which  is 
discussed  in  the  International  Harvester  decision  in  this  chapter-  and  in  the 
Steel  Corporation  opinion  in  Chapter  V. 

The  Keystone  Watch  case  is  illuminating,  also,  along  with  the  St.  Louis 
Terminal  Association  decision,^  as  an  indication  of  the  wise  application  of  the 
law  since  the  Standard  Oil  opinion,  in  making  a  distinction  between  the 
good  and  the  bad  features  of  a  business.  Before  191 1  a  combination  must 
necessarily  have  been  either  approved  in  entirety  as  to  its  organization  and  con- 
duct and  allowed  to  go  unmolested,  or  else  have  been  unqualifiedly  condemned 
and  summarily  dissolved.  But  in  these  instances,  it  appears  that  a  public 
policy  is  possible  which  shall  correct  the  unwholesome  features,  and  yet  leave 
open  the  door  of  enterprise  to  realize  all  of  the  rewards  of  ability,  except  those 
which  flow  from  an  arbitrary  and  unfair  exercise  of  power  and  advantage. 
To  effect  such  a  distinction  between  good  and  evil  is,  as  will  appear  in  the 
next  chapter,  the  task  laid  upon  the  Federal  Trade  Commission  in  1914,  act- 
ing in  cooperation  with  the  judiciary.  Not  for  years  has  the  outlook  for 
industrial  peace  in  the  domain  of  large  enterprises  looked  more  hopeful,  in 
consequence  of  decisions  of  this  sort.  —  Ed. 

^  Stevens  categorically  assembles  them  in  Political  Science  Quarterly,  Vol.  XXIX, 
1914,  pp.  282-306  and  460-490;   and  Industrial  Combinations  and  Trusts,  chapter  XII. 
2  P.  634,  infra.  ^  P.  495,  supra. 


6o6  TRUSTS,   POOLS  AND   CORPORATIONS 

THE    BATHTUB  CASE  i 
A  Patent  Pool 

The  United  States  brings  this  suit.  It  will  be  called  the 
government.  Its  petition  is  filed  under  the  fourth  section  of  the 
Sherman  Anti-Trust  Act.  It  charges  that  the  defendants  have 
violated  the  first  and  second  sections  of  that  act.  It  says  that  they 
have  conspired  to  restrain  interstate  trade  in  sanitary  enameled 
iron  ware,  and  have  attempted  to  monopolize  such  trade  therein. 
All  the  defendants  are  concerned  in  making  and  selling  that 
ware.  It  is  made  of  cast  iron.  It  is  coated  with  enamel.  It  has 
the  appearance  of  being  porcelain  lined.  Bathtubs,  lavatories, 
closet  bowls,  and  tanks,  sinks,  and  urinals  are  among  the  more 
important  articles  made  of  it.     It  will  be  referred  to  as  the  ware. 

There  are  50  defendants.  Sixteen  are  corporations.  They 
will  be  called  the  corporate  defendants.  Thirty-four  are  in- 
dividuals. They  are  styled  individual  defendants.  One  of 
them  is  Edwin  L.  Wayman.  With  him  each  of  the  corporate 
defendants  made  an  agreement.  These  agreements  the  gov- 
ernment says  restrain  trade  in  the  ware,  and  attempt  to  mo- 
nopolize it.  The  other  33  individual  defendants  are  officers  of 
the  corporate  defendants.  The  government  charges  that  they 
each  were  among  the  persons  who  knowingly  caused  the  cor- 
porate defendants  to  do  that  of  which  it  complains. 

Opinion  of  the  Court 

These  16  agreements  were,  with  exceptions  to  be  mentioned, 
identical  in  their  language.  At  least  15  of  the  16  corporate 
defendants  had  directly  or  indirectly  taken  part  in  drafting  the 
common  form.  They  were  executed  by  nearly  all  the  corporate 
defendants  on  the  same  day  and  at  the  same  place.  No  defend- 
ant entered  into  the  agreement  without  knowing  that  at  least 
13  of  the  other  corporate  defendants  had  executed  it,  or  intended 
so  to  do.  Without  this  knowledge  no  one  of  them  would  have 
become  a  party  to  it.     Each  of  these  agreements  is  in  the  form 

1  U.  S.  V.  Standard  Sanitary  Man'fg  Co.,  Circuit  Court,  191  Fed.  Rep.  172  ; 
226  U.  S.  220  ;   decided  October  13,  191 1.     Omissions  are  not  always  indicated. 


THE    BATHTUB   CASE  607 

of  a  license  granted  by  Wayiiian  accepted  by  a^-corporate 
defendant.  The  patents  under  which  the  licenses  purported  to  -- 
be  granted  were  first  put  into  Wayman's  name  two  days  before 
most  of  the  agreements  were  executed.  The  terms  of  the 
agreements  had  been  definitely  settled  at  least  two  weeks 
earlier.  There  were  three  patents.  They  all  were  for  auto- 
matic dredgers.  A  dredger  is  a  tool  used  in  the  enameling 
step  of  making  the  ware.  The  licenses  were  granted  for  a 
period  of  two  years,  beginning  June  i,  19 10.  Each  licensee 
promised  on  the  5th  day  of  each  month  to  pay  $$  a  day  for 
each  furnace  used  by  it  for  the  making  of  the  ware  during  the 
preceding  month.  Wayman  undertook  that  he  would  three 
months  later  pay  back  $4  out  of  every  $5.  This  undertaking 
was  conditioned  upon  the  licensee  having  in  the  meantime  done 
all  he  had  agreed  to  do.  There  are  about  25  working  days  a 
month.  Wayman  on  the  5th  of  every  month,  therefore,  re- 
ceived $125  for  each  furnace  continuously  operated  during  the 
preceding  month  by  any  one  of  his  licensees.  One  hundred 
dollars  of  this  he  was  eventually  to  pay  back.  This  repayment 
was  not  to  be  made  until  three  months  had  gone  by.  After  the 
first  four  months,  he  would  always  have  in  his  hands  $300  of 
his  licensees'  money  for  every  furnace  of  theirs  in  steady  use. 
As  it  actually  turned  out,  he  usually  held  between  $40,000  and 
$50,000  belonging  to  them.  This  money  was  in  the  nature  of 
cash  bail.  Each  corporate  defendant  in  this  manner  gave 
security  that  he  would  keep  his  bargain,  or  be  good,  as  one  of 
the  licensees  expressed  it.  Each  corporate  defendant  promised 
to  do  three  things:  (i)  It  would  not  sell  any  "seconds"  or 
"Bs"  of  any  of  the  ware  except  bathtubs.  It  apparently 
reserved  the  right  to  market  what  the  trade  calls  "  non- 
guaranteed "  bathtubs.  (2)  It  would  not  sell  any  ware  to  any 
jobber  who  did  not  sign  the  jobbers'  resale  agreement  to  be 
presently  described.  (3)  It  would  not  sell  anybody  any  ware  at 
a  lower  price  or  upon  more  attractive  terms  than  those  named 
in  the  agreement  or  in  a  schedule  attached  to  it.  This  schedule 
named  standard  prices  for  each  article  of  the  ware  and  for  each 
size,  shape,  and  grade  of  that  article.  All  the  corporate  de- 
fendants promised  that  they  would  not  sell  some  articles  below 


6o8  TRUSTS,    POOLS   AND    CORPORATIONS 

the  scheduled  price.  Some  of  them  undertook  not  to  sell  any 
articles  below  these  prices.  Some  of  the  corporate  defendants 
had  not  the  established  reputation  of  others,  or  they  had  not  as 
efficient  a  selling  force.  They  would  not  take  licenses  unless 
they  were  allowed  to  sell  some  aj-ticles  at  a  little  lower  price 
than  those  quoted  by  their  stronger  rivals.  After  much  negotia- 
tion, it  was  settled  by  a  committee  of  the  corporate  defendants 
that  some  of  them  should  be  allowed  to  sell  some  articles  at  a 
discount  of  2^  in  some  instances,  of  5  per  cent  in  others,  from 
the  scheduled  prices.  The  permission  to  give  this  discount, 
granted  to  some  of  the  corporate  defendants  and  not  to  others, 
was  the  only  respect  in  which  there  was  any  difference  among 
any  of  the  agreements  as  executed.  The  negotiation  as  to 
which  of  the  corporate  defendants  should  be  allowed  by  the 
others  to  give  these  preferential  prices  to  their  customers  and 
how  great  the  permitted  discount  should  be  was  finished  before 
any  of  the  agreements  were  executed  and  before  any  of  the 
patents  had  been  put  in  Wayman's  name.  The  resale  agree- 
ment which  the  jobber  in  the  ware  was  required  to  sign  bound 
him  in  two  respects  :  (i)  He  could  not  buy  any  ware  from  any 
one  other  than  the  corporate  defendants.  (2)  He  could  not 
sell  ware  to  anybody  at  a  lower  price  or  on  more  attractive 
terms  than  those  named  in  the  resale  price  lists. 

The  principles  upon  which  these  resale  prices  were  to  be 
worked  out  in  detail  had  been  agreed  upon  between  Wayman 
and  a  committee  chosen  by  nearly  all  of  the  corporate  de- 
fendants. This  agreement  was  reached  before  any  licenses 
were  accepted,  and  before  any  of  the  patents  had  become 
Wayman's.  The  licenses  provided  that  no  changes  in  the  sale 
or  resale  prices  could  be  made  without  the  consent  of  Wayman 
and  the  majority  of  a  committee  elected  by  the  corporate  de- 
fendants. The  agreements  restricted  in  a  number  of  ways  the 
freedom  of  both  the  corporate  defendants  who  made  the  ware 
and  the  jobbers  who  sold  it  to  the  plumbers.  An  article  of  the 
ware  must  always  be  billed  separately  from  other  goods  sold  at 
the  same  time  to  the  same  person.  Many  articles  could  not  be 
shipped  uncrated.  No  allowance  could  be  made  for  a  returned 
crate  and  so  on.     There  were  jobbers  to  whom  these  rules  or 


THE   BATHTUB   CASE  609 

some  of  them  were  distasteful.  Dealers  were  forccd^to  change 
their  methods  of  doing  business  which  they  had  followed  for 
years  to  the  mutual  satisfaction  of  themselves  and  their  custom- 
ers. These  requirements  had  a  purpose.  Competition  in  price 
cannot  be  altogether  shut  off  unless  everybody  is  made  in  some 
respects  to  do  business  in  precisely  the  same  way  as  everybody 
else.  Each  jobber,  like  each  maker,  was  called  on  to  give  cash 
security  that  he  would  carry  out  his  bargain.  He  had  to  pay 
5  per  cent  more  for  the  ware  than  the  maker  expected  to  get  out 
of  it.  If  he  had  not  cut  prices  and  had  not  bought  ware  from 
anyone  other  than  the  corporate  defendants  at  the  end  of  the 
calendar  year,  he  was  entitled  to  receive  a  rebate  of  5  per  cent 
on  the  amount  paid  by  him  during  the  year.  If  his  purchases 
from  all  the  corporate  defendants  combined  had  amounted  to  as 
much  as  $30,000,  his  rebate  was  to  be  at  the  rate  of  10  per  cent. 
Applications  for  rebates  were  to  be  made  to  Wayman.  When 
he  approved  them,  they  were  paid  by  the  corporate  defendant 
or  defendants  which  had  sold  the  applicant  the  ware.  Nearly 
400  jobbers  signed  these  agreements.  They  constituted  more 
than  four  fifths  of  all  the  jobbers  in  the  country.  The  consump- 
tion of  the  ware  is  large.  Wayman  doubtfully  estimated  the 
annual  value  of  the  national  output  of  it  at  $14,000,000.  It  is 
hardly  less  than  $10,000,000.  It  may  be  much  more.  Up- 
wards of  80  per  cent  of  the  jobbers  took  licenses.  They  prob- 
ably handled  at  least  80  per  cent  of  the  product ;  that  is,  their 
total  yearly  purchases  from  the  corporate  defendants  must 
have  footed  up  about  $8,000,000.  A  rebate  of  5  per  cent  on 
$8,000,000  amounts  to  $400,000  of  10  per  cent  to  $800,000. 
Towards  the  close  of  every  calendar  year  the  corporate  defend- 
ants would  among  them  hold  in  the  neighborhood  of  half  a 
million  of  the  jobbers'  money.  Moreover,  the  agreements  told 
the  jobbers  in  plain  words  that,  if  they  cut  prices  or  bought 
ware  from  anybody  other  than  the  corporate  defendants,  none 
of  the  latter  would  sell  them  again.  There  were  jobbers  who 
did  not  like  some  of  the  new  rules.  Some  of  them  thought  their 
money  would  be  more  useful  in  their  own  bank  account  than  in 
that  of  the  corporate  defendants.  A  little  less  than  one  fifth  of 
them  refused  to  sign  the  agreements. 


6io  TRUSTS,    POOLS  AND   CORPORATIONS 

On  the  other  hand,  there  was  from  the  jobbers'  standpoint 
much  that  was  attractive  in  the  scheme  as  a  whole.  Compe- 
tition had  been  fierce.  It  had  not  always  been  either  wise  or 
honest.  A  badly  made  article  may  look  well  enough  to  deceive 
the  average  householder.  Many  such  had  been  put  on  the 
market.  When  the  defects  were  speedily  discovered,  the  jobber 
might  have  to  take  back  the  article.  The  cost  of  doing  so  ate 
up  the  profit  on  a  number  of  like  articles  which  were  not  re- 
turned. There  was  little  profit  in  handling  the  ware.  If  every 
dealer  signed  the  agreement,  none  of  them  could  gain  by  taking 
from  the  makers  and  putting  off  on  the  public  any  ware  except 
bathtubs,  not  standard  of  its  kind.  The  lowest  price  the  makers 
could  take  would  buy  a  good  article.  No  one  would  have  a 
"  second "  if  for  the  same  money  he  could  get  a  standard. 
Moreover,  while  non-guaranteed  bathtubs  could  be  sold,  the 
price  below  which  they  could  not  be  sold  was  fixed.  The  job- 
bers would  therefore  insist  on  getting  the  best  of  that  not  very 
good  grade.  With  the  worst  made  articles  taken  out  of  the 
market,  friction  with  customers  would  be  lessened.  The  repu- 
tation of  the  ware  would  be  raised.  Every  jobber  would  know 
that  he  was  buying  and  selling  on  the  same  terms  as  his  com- 
petitors. He  could  tell  to  the  fraction  of  a  cent  what  his  gross 
profit  on  every  article  sold  by  him  would  be.  He  could  regulate 
accordingly  his  expenditures  for  handling  and  advertising  it. 
If  he  did  not  take  a  license,  he  took  large  chances.  No  one  of 
the  corporate  defendants  would  sell  to  him. 

Of  250  furnaces  in  the  country  the  defendants  owned  195, 
or  78  per  cent.  In  drawing  building  specifications  architects 
frequently  called  for  ware  made  by  a  particular  manufacturer. 
A  jobber  who  could  not  furnish  a  plumber  with  what  he  wanted 
for  a  large  job  was  likely  to  lose  his  custom  altogether.  May, 
19 10,  must  have  been  a  trying  time  for  jobbers  with  a  stubborn 
hking  for  independence,  and  a  taste  for  managing  their  own 
business  in  their  own  way.  As  already  stated,  in  the  end  four 
out  of  every  five  of  the  jobbers  signed  up.  Many  of  them  did  so 
willingly  and  even  enthusiastically.  It  is  probable  that  the  large 
majority  of  them  welcomed  the  cKance  of  doing  so.  Their  asso- 
ciations had  been  urging  the  manufacturers  to  put  in  force  a  resale 


THE   BATHTUB   CASE  6ii 

arrangement.  A  number  of  them  have  testified  that  they  wanted 
it.  While  it  lasted,  they  say  they  fovmd  it  pleasant  and  profit- 
able. In  consequence  of  these  proceedings  and  of  other  action 
taken  by  the  government,  the  corporate  defendants  on  January  i, 
191 1,  suspended  so  much  of  the  agreements  as  fixed  original  and 
resale  prices.     Many  of  the  jobbers  regret  the  suspension. 

With  whatever  of  enthusiasm,  with  whatever  of  reluctance, 
the  makers  of  nearly  four  fifths  of  the  ware  and  more  than  four 
out  of  every  five  dealers  in  it  became  parties  to  the  combination. 
The  corporate  defendants,  and  many,  if  not  most,  of  the  jobbers, 
were  engaged  in  interstate  commerce  in  the  ware.  Such  com- 
merce was  directly  restrained  by  the  agreements.  The  makers 
who  became  parties  to  them  could  no  longer  sell  the  jobbers 
who  did  not.  The  jobbers  who  did  could  no  longer  buy  from 
the  makers  who  did  not.  The  defendants  did  their  best  to  get 
all  the  makers  of  importance  and  all  the  dealers  to  become 
parties  to  the  scheme.  If  they  had  succeeded,  Wayman  and  a 
committee  of  the  corporate  defendants  would  for  two  years  from 
June  I,  1910,  have  been  able  to  say  that  no  man  anywhere  in 
the  United  States  should  buy  a  bathtub  or  any  other  article  of 
the  ware  at  a  lower  price  than  it  might  have  suited  them  to  fix. 
If  the  trade  would  then  have  been  monopolized,  the  defendants 
attempted  to  monopolize  it. 

The  important  questions  in  the  case  are  two  :  (i)  Would  such 
a  combination  as  was  attempted,  and  in  large  part  brought  about, 
have  violated  the  Sherman  Act,  had  patents  on  automatic  dredgers 
played  no  part  in  it  ?  (2)  If  it  would,  did  the  part  played  by  those 
patents  make  lawful  what  otherwise  would  have  been  forbidden  ? 

The  defendants  argue  that  not  every  agreement  to  fix  and 
maintain  prices  in  interstate  commerce  violate  the  Sherman  Act. 
They  say  that  eyes  illumined  by  the  light  of  reason  will  see  that 
what  the  defendants  did  was,  from  the  standpoint  of  the  pubHc 
interests,  good  and  not  evil.  They  contend  that  the  jobbers 
were  making  little  profit  on  the  ware.  It  was  troublesome  and 
costly  to  handle.  "  Seconds  "  were  on  the  market.  "The  ware 
was  getting  a  bad  reputation.  If  the  defendants  had  not  done 
what  they  did,  there  would  soon  have  been  no  trade  either  to 
restrain  or  to   monopolize.     There  is  little  in  the  record  to  sup- 


6i2  TRUSTS,   POOLS  AND   CORPORATIONS 

port  this  contention.  Such  an  apprehension  is  vaguely  expressed 
by  some  witnesses.  If  there  had  been  marked  falling  off  in  the 
sale  of  the  ware,  the  defendants  know  it.  They  could  have  shown 
it  by  definite  and  precise  figures.  They  made  no  attempt  to  do 
so.  If  there  was  any  such  danger,  it  was  very  remote,  far  too 
remote  to  justify  the  defendants  in  doing  anything  which  except 
for  it  would  have  been  unlawful.  That  there  was  any  real  danger 
at  all  is  not  shown.  According  to  the  defendants,  the  public 
gained  by  what  was  done  even  upon  the  assumption  that,  if  it 
had  been  left  undone,  the  trade  would  have  continued  in  undi- 
minished volume.  The  ultimate  purchaser  of  the  ware  seldom 
knows  whether  he  gets  a  well-made  article.  To  his  eyes  it  may 
look  well.  He  may  think  that  it  will  for  years  be  useful,  sightly, 
and  sanitary.  In  a  few  months  he  may  find  that  it  is  wearing 
badly,  and  has  become  unsightly.  He  may  have  reason  to  fear 
that  to  some  extent  it  has  become  dangerous  to  the  health  of 
himself  and  his  family.  He  suffers  from  the  greed  of  the  maker, 
the  jobber  or  the  plumber,  or  of  two  or  all  of  them.  He  will  be 
in  no  danger  from  that  greed  when  no  one  of  them  can  any 
longer  make  any  money  by  selling  him  a  bad  article  for  the 
price  of  a  good.  Human  nature  being  what  it  is,  no  other 
effective  protection  can  be  given  him.  If  the  so-called  "  seconds  " 
and  "  Bs"  are  put  upon  the  market  at  all,  most  of  them  will  in 
the  end  be  bought  by  people  who  do  not  know  what  they  are 
buying.  It  is  useless,  according  to  this  argument,  to  call  the 
makers  together  and  ask  them  to  stop  selling  such  goods. 
Resolutions  pledging  all  the  manufacturers  to  stop  making  and 
seUing  them,  it  is  true,  may  be  easily  passed.  They  will  be 
adopted  with  enthusiasm  or  with  solemnity  according  to  the  mood 
of  the  moment,  but  always  with  absolute  unanimity.  Like  so  many 
other  gentlemen's  agreements,  they  will  be  straightway  broken. 
If  an  enforceable  bargain  can  be  made  that  no  goods  shall  be 
sold  below  a  certain  fixed  price,  which  will  yield  a  reasonable 
profit  on  a  first-class  article,  jobbers  and  plumbers  can  be 
depended  upon  not  to  pay  that  price  for  an  inferior  article.  The 
defendants  say  that  in  no  other  way  can  seconds  be  taken  off 
the  market  and  kept  off.  They  point  to  what  happened  after 
January  i,  191 1,  when  the  price-fixing  provisions  of  the  agree- 


THE   BATHTUB   CASE  613 

ment  were  suspended.  The  prohibitions  against  sellin|f**  Bs  "  and 
"  seconds  "  were  still  in  full  force.  Nevertheless  the  defendants' 
witnesses  say  that  the  market  was  at  once  flooded  with  low-grade 
ware.  Much  of  it  came  from  some  of  the  corporate  defendants. 
It  may  be  better  for  the  public  to  pay  a  higher  price  for  better 
ware.     Most  individuals  find  that  it  is  usually  cheaper  in  the  end. 

Still,  two  questions  remain:  (i)  Does  the  law  permit  the 
additional  price  which  the  public  is  to  pay  to  be  fixed  by  a  com- 
bination of  dealers  even  if  the  latter  do  so,  because  they  cannot 
in  any  other  way  keep  some  of  their  own  number  from  selling 
bad  ware  for  good.-*  (2)  Has  the  experience  of  mankind  led 
them  to  beUeve  that  to  permit  all  the  makers  and  dealers  in 
articles  of  common  use  to  combine  to  fix  the  prices  and  terms 
below  which  those  goods  may  not  be  sold  will  tend  in  the  long 
run  to  improve  the  quality  of  the  goods  .-* 

The  second  question  is  not  for  the  courts.  The  learned  counsel 
for  the  defendants  say  that  the  first  need  not  be  answered  in 
this  case.  They  claim  that  prices  were  not  raised  by  the  de- 
fendants. They  assert  that  the  evidence  shows  that  they  were 
in  fact  lowered.  The  contention  rests  on  a  statement  of  Way- 
man.  He  says  that  the  prices  as  fi.xed  were  intended  to  be  on 
an  average  about  5  per  cent  below  those  named  in  the  last  pre- 
viously published  price  list  of  the  defendant,  the  Standard  San- 
itary Manufacturing  Company.  The  counsel  for  the  defendants 
in  supposing  that  Way  man  meant  that  he  reduced  the  then 
actually  prevailing  prices  have  misapprehended  the  market  con- 
ditions. They  assume  that  the  Standard  and  the  other  corporate 
defendants  were  in  fact  getting  the  prices  set  forth  in  their 
catalogue.  The  record  shows  that  they  were  not.  Whether 
they  ever  had  does  not  appear.  They  certainly  had  not  during 
any  of  the  period  as  to  which  the  record  speaks.  If  in  the  win- 
ter and  spring  of  1910  those  prices  had  prevailed,  there  would 
have  been  no  agreements  and  consequently  no  case.  The  agree- 
ments as  made  became  fully  operative  June  4,  1910.  No  witness 
says  that  the  pubUshed  list  prices  had  for  many  months  been 
generally  paid.     The  evidence  is  overwhelming  that  they  had  not. 

On  August  4,  1909,  Wayman  became  commissioner  or  actuary 
of  a  newly  organized  or  reorganized  Sanitary  Enameled  Ware 


6i4  TRUSTS,   POOLS  AND   CORPORATIONS 

Association.  All  the  corporate  defendants,  except  the  Kerner 
Manufacturing  Company,  belonged  to  it.  Four  other  makers  of 
the  ware  were  members  of  it.  These  four  refused  to  enter  into 
the  price  agreements.  Consequently  they  did  not  take  licenses 
from  Wayman.  One  of  his  duties  as  commissioner  of  the  asso- 
ciation appears  to  have  been  to  do  what  he  could  by  argument 
and  expostulation  to  prevent  price  cutting  among  its  members. 
To  this  end  he  wrote  many  letters.  In  one  of  them  he  speaks 
of  cuts  from  2.}  to  5  per  cent  below  the  pubhshed  prices  as  the 
normal  and  usual  thing.  He  takes  them  for  granted.  They  are 
not  cause  for  complaint.  What  worries  him  is  the  cuts  of  20  per 
cent  which  he  says  were  then  being  made.  In  March,  1910,  the 
terms  of  the  agreements  executed  two  months  later  were  being 
worked  out  by  correspondence  and  conferences  among  the  de- 
fendants. In  that  month  Commissioner  Wayman  urged  the 
members  of  the  association  to  stop  quoting  what  he  called  the 
"  ridiculous  "  prices  which  had  recently  been  made.  The  Stand- 
ard Sanitary  Manufacturing  Company,  whose  pubhshed  price 
lists  defendants'  counsel  suppose  show  the  actual  market  prices, 
appears  to  have  had  a  regularly  organized  system  of  rebates. 
When  the  agreements  now  in  controversy  went  into  effect,  the 
Standard  notified  its  customers  that  their  special  rebates  would 
be  withdrawn.  They  were  told,  however,  that  checks  would  be 
sent  them  for  whatever  rebates  were  then  due.  The  correspond- 
ence between  the  Standard  and  another  of  its  customers  shows 
that  he  had  been  buying  at  the  "  supposed  "  car  load  limit  price 
less  a  confidential  yl  per  cent  discount.  Whether  the  "supposed " 
car  load  limit  price  was  the  published  price  or  a  generally  under- 
stood discount  below  it  does  not  appear. 

The  record  contains  many  letters  written  by  jobbers  to  some 
one  or  the  other  of  the  corporate  defendants  asking  that  orders 
alleged  to  have  been  sent  in  before  June  4,  1910,  should  be  filled 
at  the  old  prices.  Sometimes  their  requests  were  granted.  They 
were  grateful.  Sometimes  they  were  told  that  their  order  had 
not  come  to  hand  before  June  4.  If  filled,  it  must  be  at  the  new 
prices.  A  long  correspondence  usually  followed.  The  jobber 
tried  hard  to  get  the  ware  at  the  old  price.  Many  letters  passed 
between  one  SuUwold  and  the  defendant  Ahrens.     Ahrens  is 


THE    BATHTUB   CASE  615 

president  of  the  Standard.  Sullwold  is  head  of  a  l^nneapolis 
jobbing  house.  He  did  not  like  the  new  scheme.  Ahrens  tried 
to  get  him  to  come  into  it.  They  wrote  each  other  at  great 
length.  They  go  into  many  details.  Whenever  one  thinks  he  can 
make  a  point  on  the  other,  he  does  so.  Sullwold  repeatedly  says 
that  the  ware  will  cost  the  jobbers  more.  Ahrens  does  not  deny. 
Both  take  it  for  granted.  Way  man  testifies  that  to  stop  "ruinous 
competition  "  was  one  of  the  purposes  of  the  agreements. 

The  J.  M.  Kohler  Sons  Company  of  Sheboygan,  Wis.,  was  a 
member  of  the  Sanitary  Enameled  Ware  Association.  Wayman 
and  a  number  of  the  defendants  worked  hard  to  get  it  to  take  a 
license.  It  would  not.  It  claimed  that  the  scheme  was  a  price 
agreement,  pure  and  simple.  It  said  that  price  agreements  were 
forbidden  by  the  laws  of  the  United  States  and  of  Wisconsin. 
One  Kroos  is  connected  with  it.  He  was  a  witness  for  the  govern- 
ment. He  presented  some  elaborate  calculations  as  to  the  dif- 
ference between  the  prices  his  company  had  been  getting  for  the 
ware  and  the  prices  it  would  have  received  under  the  Wayman 
plan.  As  he  figured  it,  the  latter  were  in  every  instance  greater. 
The  difference  ranged  from  i  to  45  per  cent.  Defendants'  counsel 
say  that  he  did  not  know  what  he  was  talking  about.  Accord- 
ing to  them,  he  did  not  understand  how  the  price  tables  of  the 
defendants  were  to  be  applied.  He,  however,  gave  the  prices 
of  his  own  company  for  the  various  articles  principally  dealt  in 
by  it  and  the  defendants.  It  would  have  been  easy  for  the 
latter  to  show  what  the  true  comparison  was,  if  it  had  seemed 
to  them  expedient  so  to  do.  It  is,  however,  not  important  to 
determine  whether  Kroos  did  or  did  not  fall  into  error.  There 
is  in  the  record  a  letter  to  the  Standard  Sanitary  Manufacturing 
Company  from  one  of  its  customers.  It  was  written  shortly 
after  the  price  agreements  went  into  effect.  In  it  the  writer 
remarks  that,  of  course,  the  Standard  understood  that  he  could 
not  do  much  with  their  prices  so  long  as  Kohler  continued  to 
sell  at  the  prices  it  was  then  making.  Quite  clearly  the  new 
prices  were  materially  higher  than  Kohler's.  The  record  shows 
that  the  agreements  were  intended  to  raise  prices,  and  that  they 
did  so.  How  great  the  increase  was  is  not  shown  either  in 
percentages  or  in  dollars  and  cents.     To    have    figured    it  out 


6i6  TRUSTS,   POOLS   AND   CORPORATIONS 

would  have  taken  much  time  and  money.  Very  likely  no  one 
knows  how  much  prices  were  raised.  Each  defendant  knows 
how  much  more  it  took  in  under  the  agreements  than  it  had 
obtained  before.  No  one  of  them  had  any  accurate  knowledge 
as  to  the  gain  made  by  any  one  of  its  fifteen  corporate  codefend- 
ants.  Not  every  one  of  them  would  have  found  it  easy  to  tell 
what  the  precise  percentage  of  increase  in  the  price  received  by 
it  for  each  kind  of  article  had  been.  Before  the  agreements 
went  into  effect,  there  was  no  fixed  price.  In  every  large  trans- 
action and  in  many  that  were  not  large  the  price  actually  paid 
was  the  outcome  of  a  special  and  usually  of  a  secret  bargain. 

Not  only  did  the  agreements  raise  prices  —  they  prevented 
reductions  that  would  otherwise  have  been  made.  The  market 
conditions  in  the  winter  and  spring  of  19 lo  were  such  that 
prices  left  to  themselves  would  have  gone  still  lower.  How 
rapidly  the  drop  would  have  run  into  money  is  shown  by  a 
statement  of  the  president  of  the  Standard.  He  was  trying  to 
get  the  Kohler  company  to  take  a  license.  He  pointed  out 
how  good  a  thing  the  scheme  was  from  the  manufacturer's 
standpoint.  He  said,  if  it  did  not  go  through,  it  would  cost  the 
Standard's  stockholders  ^300,000  in  19 10,  for  in  that  event  he 
would  have  to  reduce  prices.  The  defendants  say  that  prices 
may  be  too  low  for  the  public  good.  Competition  may  be  car- 
ried far  enough  to  hurt  everybody  concerned.  It  may  in  the 
end  be  the  direct  cause  of  monopoly.  Under  its  stress  all  but 
the  strongest  producers  may  go  to  the  wall.  The  government 
replies  that,  if  all  the  makers  of  an  article  of  common  use  com- 
bine to  raise  and  maintain  prices  and  to  punish  any  one  of  their 
number  who  reduces  them,  all  the  evils  which  to  common  expe- 
rience of  mankind  result  from  monopolies  will  surely  follow. 
Possibly  both  the  defendants  and  the  government  speak  truly. 
It  maybe  that  one  of  the  great  problems  of  the  day  is  to  find 
some  way  of  protecting  the  general  public  against  monopolistic 
combinations  without  compelling  business  men  to  subject  them- 
selves and  their  capital  to  all  the  perils  of  unrestrained  compe- 
tition. To  find  its  solution  would  appear  to  be  the  business  of 
the  statesman.  The  defendants  say  the  courts  may  give  it.  In 
their  opinion  makers  and  dealers  may  combine  to  raise  prices 


THE   BATHTUB   CASE  617 

without  violating  the  Sherman  Act,  provided  thar^fhe  prices 
fixed  by  their  agreement  are  not  unreasonably  high. 

In  each  particular  case  upon  the  evidence  submitted  the 
courts  must  say  whether  the  prices  asked  are  or  are  not  rea- 
sonable. It  would  not  be  an  easy  task.  Some  standard  of 
reasonableness  would  have  to  be  worked  out.  The  factors  to 
be  taken  into  account  would  be  numerous  and  complex.  The 
labor  and  expense  of  finding  out  what  all  the  relevant  facts 
were  would  be  enormous.  After  all  was  done  and  said,  the 
margin  of  doubt  would  usually  remain  large.  If  the  dealers 
were  bound  to  show  affirmatively  that  their  prices  were  reason- 
able, the  government  would  usually  win.  If  the  government 
had  to  show  that  they  were  unreasonably  high,  it  would  ordi- 
narily lose.  In  this  case  the  defendants  assume  that  the  burden 
of  proof  as  to  the  unreasonableness  of  their  prices  is  on  the 
government.  They  say,  and  say  truly,  that  the  government 
has  neither  shown  nor  attempted  to  show  that  the  schedule 
prices  were  unreasonable.  The  government  replies  every  agree- 
ment to  fix  prices  and  to  force  or  bribe  makers  or  dealers  to 
maintain  them  is  illegal.  In  its  view  there  are  no  circumstances 
in  this  case  which  take  it  out  of  the  general  rule.  The  presump- 
tion of  law  is  that  the  prices  which  have  been  made  by  the  free 
and  untrammeled  trafficking  of  the  market  place  are  the  reason- 
able prices.  Any  one  who  interferes  with  the  natural  action 
and  interaction  of  this  bargaining  assumes  the  burden  of  showing 
that  what  he  did  was  fair  and  reasonable.  If  such  a  burden  rests 
on  the  defendants,  it  has  not  been  sustained.  They  had  not  shown 
what  capital  they  have  invested  in  the  business.  They  have  not 
told  what  net  profit,  if  any,  they  earned  under  the  old  prices. 

These  opposing  contentions  raise  questions  of  great  moment 
and  of  exceeding  difficulty.  To  answer  them  wisely  may  require 
going  to  the  very  roots  of  our  conceptions  of  what  the  relation 
of  the  state  to  the  industrial  life  of  its  people  should  be.  Every 
one  has  the  right  to  discuss  them.  It  may  be  a  duty  to  do  so 
at  all  reasonable  times  and  in  all  proper  places.  This  opinion 
is  not  a  proper  place  for  such  a  discussion.  Some  men  believe 
that  price  agreements  should  be  sustained  by  the  courts,  unless 
they  are  shown  to  be  against  the  public  interest.     Others  hold 


6i8  TRUSTS,    POOLS   AND    CORPORATIONS 

that  they  may  be  permitted  only  when  it  is  affirmatively  shown 
that  they  promote  the  public  interest.  Still  others  say  that  a  price 
agreement  pure  and  simple  is  always  illegal.  That  the  Supreme 
Court  has  declared  the  last  of  the  above-stated  contentions  to  be 
the  law  is  conclusive  here.     Only  a  few  months  ago  it  said : 

Agreements  or  combinations  between  dealers,  having  for  their  sole 
purpose  the  destruction  of  competition  and  the  fixing  of  prices,  are 
injurious  to  the  public  interest  and  void.  Dr.  Miles  Medical  Co.  v. 
Jokn  D.  Park  6^  Sons  Co.,  220  U.  S.  408,  31  Sup.  Ct.  384,  55  L.  Ed.  519. 

[2]  At  the  moment  we  are  considering  only  one  question, 
Would  the  agreements  have  violated  the  Sherman  Act  had  the 
dredger  patents  had  no  part  in  them  .''  They  destroyed  competi- 
tion. They  lixed  prices.  For  that  purpose  they  were  made. 
They  had  no  other.  Defendants  say  that  to  fix  prices  and  to 
destroy  competition  would  have  been  to  their  profit  and  to  the 
public  good.  They  may  not  break  the  law  because  they  think 
that  it  will  be  well  to  do  so.  In  view  of  the  character  of  the 
parties,  the  necessary  effect  of  the  agreements  was  clearly  to 
restrain  trade  within  the  purview  of  the  statute.  In  such  case 
they  cannot  be  taken  out  of  the  category  of  the  unlawful  by 
general  reasoning  as  to  their  expediency  or  non-expediency  or 
the  wisdom  or  want  of  wisdom  of  the  statute  which  prohibited 
their  being  made.  When  the  nature  and  character  of  the  con- 
tracts create  a  conclusive  presumption  bringing  them  within  the 
statute,  such  a  result  is  not  to  be  disregarded  by  the  courts  by 
a  substitution  of  a  judicial  appreciation  of  what  the  law  ought  to 
be  for  the  plain  judicial  duty  of  enforcing  the  law  as  it  is. 
Standard  Oil  Co.  v.  United  States,  221  U.  S.  65,  31  Sup.  Ct.  502, 
55  L.  Ed.  619. 

It  follows  from  what  has  been  said  that,  unless  protected  by 
the  terms  or  the  policy  of  the  patent  laws,  the  agreements  violate 
the  Sherman  Act. 

[3]  2.  Did  the  part  played  by  the  patents  make  lawful  what 
was  otherwise  forbidden  1  The  ware  is  made  of  cast  iron.  After 
it  has  been  shaped,  it  is  enameled.  Enameling  involves  two 
distinct  processes.  In  each  there  are  several  steps.  The  ware 
is  first  given  what  is  called  the  "  slush  "  coat.     This  is  enamel 


THE    BATHTUB   CASE  619 

applied  in  liquid  form.  It  is  burnt  on  the  base  by  the  applica- 
tion of  intense  heat.  The  article  is  placed  in  a  furnace.  It  is 
raised  to  a  red  heat,  say  1500  degrees  Fahrenheit  or  upwards. 
It  is  taken  from  the  furnace.  While  it  still  glows,  powdered 
enamel  is  sprinkled  upon  it.  It  is  put  back  in  the  furnace. 
It  is  again  heated.  When  it  is  taken  out,  it  usually  is  again 
sprinkled  with  the  powder.  If  so,  it  is  again  reheated  to  fuse 
the  enamel  upon  its  surface.  This  process  may  be  repeated  in- 
definitely. Ordinarily  two  coats  of  the  powder  suffice.  When 
the  last  has  been  burnt  on,  the  ware  is  allowed  to  cool.  It  is 
ready  for  finishing,  inspection,  cleaning,  shipment,  and  sale. 

The  patents  spoken  of  in  this  case  are  for  automatic  dredgers. 
A  dredger  is  used  to  sprinkle  the  powdered  enamel  on  the  ware. 
It  serves  no  other  purpose.  It  is  not  used  in  making  the  iron, 
or  the  ware  out  of  the  iron,  or  the  hquid,  or  the  powdered  enamel, 
nor  in  the  construction,  the  heating,  or  operation  of  the  furnace, 
nor  in  taking  the  weighty  and  red-hot  metal  out  of  the  furnace 
and  putting  it  back.  In  the  doing  of  these  things  many  com- 
positions of  matter,  machines,  tools,  appliances,  and  processes 
are  employed.  Upon  the  well  doing  of  every  one  of  them  the 
usefulness,  the  attractiveness,  and  the  durability  of  the  ware  de- 
pend. Whether  any  one  of  them  shall  be  well  or  ill,  cheaply  or 
expensively  done,  turns  in  greater  or  less  degree  upon  the  fitness 
and  adaptability  of  the  compositions,  machines,  tools,  appliances, 
and  processes  used.  Any  patentable  improvement  in  any  one 
of  them  would  bear  the  same  relation  to  the  ware  as  is  borne  by 
the  automatic  dredgers.  There  might  be  differences  of  degree  in 
either  direction.  In  legal  theory  no  distinction  would  be  possible. 
From  this  point  of  view  further  inquiry  into  the  precise  degree 
of  usefulness  of  the  automatic  dredger  in  the  sprinkling  step  of 
the  enameling  process  of  making  the  ware  might  be  omitted. 

The  question  of  law  will  be,  in  any  event,  whether  the  owner 
of  a  patent  on  one  of  many  tools  used  in  the  making  of  a  par- 
ticular kind  of  unpatented  ware  may  lawfully  make  such  agree- 
ments with  reference  to  it  as  those  in  the  record.  This  case  is, 
however,  one  of  importance.  In  certain  respects  it  is  suggested 
that  it  is  one  of  the  first  impressions.  It  will  be  well,  therefore,  to 
understand  how  the  enameler  would  like  to  sprinkle  the  powder, 


620  TRUSTS,    POOLS   AND    CORPORATIONS 

and  to  what  extent  and  in  what  way  the  automatic  dredger  helps 
him  to  do  it  as  he  would.  He  wants  to  use  little  powder.  It  is 
more  or  less  costly.  The  thinner  the  enamel  coat,  the  better  the 
ware  looks  and  lasts.  The  whole  surface  of  the  article  must  be 
covered  ;  otherwise  it  will  be  almost  or  altogether  useless.  The 
more  uniform  the  coat  of  enamel  is,  the  more  sightly  and  durable 
it  will  be.  If  little  powder  is  to  fully  cover  the  entire  surface,  it 
must  be  applied  in  a  finely  divided  form.  Every  portion  of  the 
surface  must  receive  as  nearly  as  may  be  precisely  the  same 
amount  of  powder  as  any  other  portion  of  like  extent.  The 
sprinkling  must  therefore  be  done  with  great  evenness  and 
regularity.  It  must  be  done  quickly.  The  powder  will  not 
attach  itself  firmly  to  the  base,  unless  fused  upon  it.  If  every 
minute  portion  of  the  surface  is  to  be  covered,  the  powder  must 
melt  and  run  in  liquid  form  the  moment  it  touches  the  article. 
The  sprinkling  must  consequently  be  done  and  finished  while 
the  iron  remains  hot  enough  to  liquefy  the  enamel  the  instant 
the  latter  touches  the  former.  For  this  purpose  a  minimum 
temperature  of  1200  degrees  Fahrenheit  is  required.  It  is  true 
that,  if  time  does  not  suffice  to  sprinkle  the  powder  over  the  en- 
tire surface,  the  article  may  be  returned  to  the  furnace  and  re- 
heated. When  taken  out  again,  the  uncovered  portion  may  be 
sprinkled.  A  coat  applied  in  installments  does  not  usually  look 
well  to  an  expert  eye.  It  is  costly.  So  to  put  it  on  takes  more 
time  and  more  fuel.  The  manufacturer  likes  the  processes  used 
in  his  factory  to  be  of  a  kind  easy  for  the  workman  to  learn  and 
to  practice.     Labor  then  costs  less  both  in  money  and  worry. 

When  makers  of  enameled  ware  first  wanted  to  sprinkle 
powder  on  iron,  they  set  about  doing  it  in  the  way  in  which  men 
had  for  countless  centuries  been  wont  to  sprinkle  powder  for 
other  purposes.  They  took  an  ordinary  sieve,  dredge,  or  sifter. 
It  was  not  unlike  in  size  and  shape  that  with  which  housewives 
had  for  time  out  of  mind  sifted  flour  or  meal.  The  enameler,  it 
was  true,  could  not  handle  his  sifter  as  his  wife  handled  hers.  He 
could  not  stand  beside  the  surface  he  was  to  cover,  and  with 
both  hands  shake  the  dredge  over  it.  He  could  not  because 
that  surface  was  a  part  of  a  mass  of  red-hot  iron.  He  must 
stand    back    from  it.     Accordingly  a    handle  was    put   on   the 


THE    BATHTUB    CASE  621 

dredger.  He  could  not  shake  it  as  his  wife  shook  hers.  Her 
only  object  was  to  reduce  the  meal  to  a  fine  powder."^  It  made 
no  difference  whether  more  of  it  fell  upon  one  portion  of  her 
board  or  pan  than  on  another.  He  must  sprinkle  his  powder 
uniformly.  He  could  not  force  it  through  the  meshes  by  mov- 
ing the  whole  dredger  and  its  contents  more  or  less  briskly  back 
and  fro.  He  must  move  it  regularly  and  in  one  direction.  It 
was  not  desirable  to  let  it  come  back  on  its  own  tracks.  The 
enameler  shook  his  sieve  by  tapping  upon  the  handle  with  a 
piece  of  iron.  This  tapping  occupied  one  of  his  hands.  He 
had  to  support  and  guide  the  dredger  with  the  other.  He  had 
a  disagreeable  choice  to  make.  If  he  used  a  dredge  with  a 
short  handle,  he  had  to  stand  very  near  large  articles  of  glowing 
iron.  If  he  lengthened  the  handle,  the  weight  of  the  dredger 
and  its  contents,  at  the  end  of  so  long  a  lever  became  too  great 
for  his  strength.  What  he  in  fact  at  first  did  was  to  use  a 
dredger  with  a  handle  three  or  four  feet  long.  This  brought 
him  very  close  to  the  red-hot  metal.  To  partially  protect  him- 
self from  the  heat  he  wore  asbestos  masks,  gauntlets,  and  breast- 
plates. Even  so  he  had  an  uncomfortable  job.  The  heat  was 
always  disagreeable.  At  times  it  must  have  been  trying.  Sup- 
porting the  dredger  with  six  to  eight  pounds  of  powder  in  it, 
and  moving  it  steadily,  firmly,  and  accurately  over  the  surface, 
was  hard  work.  Continuously  tapping  with  the  other  hand  was 
racking  to  the  muscles  and  nerves,  although  the  force  required 
to  give  a  single  tap  was  doubtless  trifling.  Not  every  man  was 
physically  able  to  handle  a  dredger  under  such  conditions.  Few 
men  could  have  handled  it  for  more  than  a  few  minutes  at  a 
time.  They  did  not  have  to.  Bathtubs  are  the  largest  articles 
usually  made.  Defendants'  witnesses  say  that,  when  the  short- 
handled  dredger  was  used,  it  took  on  an  average  about  four  min- 
utes to  cover  a  bathtub  with  the  powder'.  The  same  witnesses 
tell  us  that  an  expert  enameler  could  enamel  some  1 1  tubs  in  a 
working  day  of  ten  hours.  Each  tub  ordinarily  was  given  two 
coats  of  the  powdered  enamel.  An  enameler,  therefore,  in  ten 
hours  went  twice  over  each  11  tubs;  that  is,  he  sprinkled  22 
coats  in  all.  It  took  him  22  times  four  minutes  to  do  it,  or 
eighty-eight  minutes  in  the  aggregate.     In  the  ordinary  course 


622  TRUSTS,    POOLS   AND    CORPORATIONS 

of  his  work  he  handled  the  dredger  for  four  minutes.  He  did 
something  else  for  23,  then  took  another  four-minute  turn  with 
the  dredger,  and  so  on  throughout  the  day.  It  may  be  that  de- 
fendants' witnesses  have  underestimated  the  number  of  tubs 
formerly  enameled  by  a  good  workman  in  a  single  day.  Even  so, 
the  enameler  used  the  dredger  for  short  intervals  only.  There 
were  relatively  long  intermissions  when  he  did  not.  If  it  had 
been  otherwise,  the  incidents  related  as  to  the  exhaustion  and 
almost  collapse  of  the  workmen  could  have  been  common  and 
typical,  instead  of  being  occasional  and  altogether  exceptional, 
as  they  doubtless  were.  Had  they  been  ordinary  occurrences, 
the  industry  could  scarcely  have  been  carried  on. 

Whether  they  were  or  were  not  frequent  is  now  immaterial. 
Before  the  first  automatic  dredger  was  invented,  it  had  ceased 
to  be  necessary  for  the  enameler  to  stand  close  to  the  glowing 
metal  or  to  support  the  weight  of  the  dredger  and  its  contents. 
It  had  occurred  to  some  one  that  the  handle  might  be  supported 
from  the  ceiling.  It  could  easily  be  balanced  by  a  counter- 
weight. The  length  of  the  handle  was  no  longer  limited  by  the 
physical  strength  of  the  workman.  It  was  made  7  or  8  feet 
long.  The  asbestos  armor  was  discarded,  except  upon  the  arm 
and  hand  most  exposed.  The  enameler  had  no  great  weight 
to  support.  One  arm  could  be  devoted  solely  to  guiding  the 
dredger.  The  other  was  still  necessarily  occupied  in  keeping 
up  a  continuous  tapping.  This  form  of  dredger  had  come  gen- 
erally, if  not  universally,  into  use  before  the  invention  of  the 
pneumatic  dredger  some  twelve  or  thirteen  years  ago.  In  es- 
sence the  patented  dredgers  differ  from  the  unpatented  in  one 
respect  only.  In  the  former  the  tapping  is  done  by  machinery. 
In  their  predecessors  it  was  done  by  hand.  The  handle  of  the 
patented  dredger  is  made  of  hollow  metal.  In  it  a  plunger  is 
fitted.  By  compressed  air  or  by  electricity  the  plunger  is  made 
to  keep  up  a  continuous  and  perfectly  steady  and  uniform  tap- 
ping. The  workman  by  the  pressure  of  his  thumb  may  at 
his  will  increase  or  decrease  the  frequency  of  these  tappings, 
or  he  may  stop  them  altogether.  The  automatic  dredgers  were 
supported  in  the  same  way  as  the  unpatented  long-handled 
dredger  had  been.     The  enameler  who  works  with  one  can  use 


THE    BATHTUB   CASE  623 

both  hands  to  guide  the  dredger.  He  has  nothing-^«ise  to  do. 
His  work  is  much  simplified,  and  made  far  easier  and  more 
agreeable.  The  use  of  both  hands  gives  him  a  better  and  a 
surer  control  over  the  motion  of  the  dredger.  There  is  less 
danger  of  his  putting  too  much  powder  in  one  place  and  too 
little  in  another.  Personally  he  is  much  more  comfortable.  He 
can  work  faster.  At  the  same  time  he  no  longer  feels  rushed 
or  driven.  He  knows  now  that  he  can  put  one  coat  on  before 
the  metal  cools.  Before  he  was  not  always,  perhaps  not  usually, 
sure  that  he  could.     As  a  rule  his  work  is  now  better  done. 

The  patented  dredger  was  useful  in  other  ways.  It  could  be 
fitted  with  a  finer  mesh.  It  puts  the  powder  on  the  metal  in  a 
more  finely  divided  form.  This,  as  has  been  already  pointed 
out,  is  an  advantage.  So  long  as  the  tapping  was  done  by  hand, 
the  blows  upon  the  handle  would  not  always  be  hard  enough  to 
force  the  powder  through  a  mesh  as  fine  as  that  which  may  now 
be  used.  The  powder  falls  from  an  automatically  tapped  dredge 
with  a  regularity  and  uniformity  greater  than  that  which  can  be 
given  to  it  by  the  average  workman.  The  use  of  patented 
dredgers  may  or  may  not  save  enameling  powder.  There  is 
testimony  both  ways.  With  such  dredgers  more  work  can  be 
done  in  the  same  time.  Other  things  equal,  it  is  probable  that 
ware,  in  the  enameling  of  which  they  have  been  used,  will  on 
the  average  be  somewhat  better  enameled  than  it  would  have 
been  had  hand  dredgers  been  employed. 

The  record  does  not  enable  us  to  tell  in  either  absolute  or 
relative  figures  or  percentages  how  great  is  the  saving  of  time 
or  the  bettering  of  quality.  The  same  number  of  men  in  the 
same  time  now  usually  turn  out  more  work  than  they  formerly 
did.  In  the  attainment  of  this  end  the  patented  dredger  helps. 
Other  things  contribute.  Some,  but  not  all,  of  these  other  im- 
provements can  be  used  to  greater  advantage  in  connection  with 
the  automatic  than  with  the  hand  dredges.  How  much  the  use 
of  the  patented  dredges  improves  the  quality  is  still  harder  to 
figure  out.  Some  men  with  fine  tools  cannot  do  as  good  work 
as  other  men  with  poor.  The  defendants'  evidence  seems  to 
show  that  the  percentage  of  ware  of  high  quality  turned  out  de- 
pends much  more  largely  upon  shop  management  and  efficiency 


624  TRUSTS,   POOLS  AND   CORPORATIONS 

than  it  does  upon  the  use  of  one  form  of  dredger  rather  than 
another.  One  of  the  defendants'  witnesses  says  that  with  the 
hand  dredge  his  shop  made  95  per  cent  of  second  and  only  5  per 
cent  of  first  class  goods.  With  the  automatic  dredger  he  gets 
25  per  cent  of  seconds  and  75  per  cent  of  firsts.  This  is  defi- 
nite enough.  Another  witness  for  the  same  side,  but  whose 
experience  has  been  had  in  another  factory,  says  that  with  the 
old  hand  dredge  he  made  only  5  per  cent  of  seconds.  By  the 
use  of  the  automatic  dredger  he  has  brought  that  proportion 
down  to  I  per  cent.  If  each  of  these  witnesses  is  even  ap- 
proximately accurate,  it  follows  that  one  of  them  with  an  auto- 
matic dredger  made  five  times  as  large  a  proportion  of  inferior 
goods  as  did  the  other  when  using  a  hand  dredger. 

All  that  can  be  safely  said  is  that  the  automatic  dredgers  are 
useful  tools.  By  their  use,  all  other  things  being  equal,  ware 
can  be  made  more  cheaply  and  on  the  whole  of  a  somewhat 
better  average  quality.  No  one  claims  that  he  can  tell  by  in- 
spection of  a  completed  article  whether  the  enameling  powder 
was  sprinkled  upon  it  with  a  hand  or  an  automatic  dredger. 
Some  of  the  witnesses  think  that,  if  they  were  shown  two  con- 
siderable lots  of  the  ware  in  the  enameling  of  one  of  which  one 
kind  of  dredger  had  been  exclusively  used  and  in  that  of  the 
other  another  kind,  they  could  say  upon  which  the  powder  had 
been  shaken  from  a  hand  dredger,  and  upon  which  from  an 
automatic  dredger.  It  does  not  appear  that  the  experiment 
ever  has  been  tried.  It  is  quite  probable,  nevertheless,  that  the 
distinction  could  frequently  be  made  with  reasonable  accuracy, 
provided  that  the  two  lots  had  both  been  made  in  the  same  shop 
by  the  same  men  and  under  otherwise  like  conditions,  except  as 
to  the  dredger  used.  The  difference  of  results  attained  in  differ- 
ent shops  as  shown  by  the  record,  and  the  further  fact  that,  as 
soon  as  the  operation  of  the  price  restrictions  was  suspended, 
some  of  the  defendants,  although  using  the  automatic  dredger 
exclusively,  put  large  quantities  of  seconds  on  the  market,  seem 
-to  show  that  it  is  unlikely  that  any  one  could  tell  upon  which  of 
two  lots  of  the  ware  made  in  different  shops  or  in  the  same  shop 
under  different  conditions  the  hand  dredger  had  been  used  and 
upon  which  the  automatic. 


THE    BATHTUB   CASE  625 

It  follows  that  there  is  no  respect  in  which  ever^utiib  in  the 
enameling  of  which  an  automatic  dredger  has  been  used  differs 
from  every  tub  in  the  enameling  of  which  the  hand  dredger  has 
been  employed.  Whether  the  ware  shall  be  well  or  ill  made, 
whether  it  shall  be  durable  or  the  reverse,  whether  it  shall  be 
sightly  or  unsightly,  depends  upon  many  circumstances  of  which 
the  kind  of  dredger  used  to  sprinkle  the  powder  is  only  one, 
and  probably  not  the  most  important.  Much  turns  on  the  com- 
position of  the  enamel.  Each  factory  makes  it  according  to  its 
own  formula,  which  it  tries  to  keep  secret.  Perhaps  none  of 
the  powders  in  use  give  complete  satisfaction.  Experiments  for 
their  bettering  are  continually  being  made.  How  controlling  a 
part  the  composition  of  "the  powder  plays  is  shown  by  the  ac- 
count given  by  one  of  the  defendants'  witnesses  of  the  disastrous 
results  upon  the  ware  of  an  experimental  change  in  the  powder 
made  since  the  first  of  the  present  year  by  one  factory.  The 
liquid  enamel  or  slush  coat  must  be  properly  made  and  fittingly 
applied.  The  furnaces  must  be  adapted  to  the  work  to  be  done 
by  them.  The  appliances  for  putting  the  ware  into  the  furnace 
and  for  taking  it  out  again  must  be  constructed,  so  that  with 
Httle  consumption  of  time  and  labor  the  work  will  be  done  with- 
out damaging  the  delicate  enamel  not  yet  firmly  fused  upon  its 
base.  The  castings  must  be  well  made  and  of  the  right  kind  of 
metal.  It  is  quite  possible  that  a  new  tool,  appliance,  or  pro- 
cess may  be  invented  for  the  better  doing  of  any  one  of  them. 
Its  use  may  improve  the  average  quality  or  cheapen  the  average 
cost  of  the  ware,  or  both.  Every  such  an  inventor,  if  he  ob- 
tained a  patent  for  his  invention,  would  be  as  much  entitled  as 
Wayman  to  say  at  what  price  and  upon  what  terms  men  might 
deal  in  the  finished  article  in  some  stage  of  the  making  of  which 
his  invention  had  been  used. 

Defendants  say  that  while  it  is  true  that  the  automatic 
dredger  is  a  mere  tool,  used  in  only  one  operation  of  a  number 
required  for  the  making  of  the  ware,  and  while  it  is  conceded 
that  merchantable  ware  can  be  made  without  its  use,  still  the 
advantages  of  using  it  are  so  great  that  as  a  commercial  prop- 
osition the  ware  cannot  be  made  without  it.  It  is  unnecessary 
to  consider  what  legal  consequences,  if  any,  would  follow  if  the 


626  TRUSTS,   POOLS  AND   CORPORATIONS 

record  sustained  this  claim.  It  does  not.  It  is  true  certain 
witnesses  say  that  in  their  judgment  the  automatic  dredgers 
have  become  necessities  for  the  manufacture  of  the  ware  for 
commercial  purposes.  The  record  conclusively  demonstrates 
that  they  are  mistaken.  Such  concerns  as  the  J.  M.  Kohler 
Sons  Company  and  the  Iron  City  Sanitary  Manufacturing 
Company  have  no  rights  under  any  of  the  patents.  There  is 
no  evidence  of  their  having  infringed  them.  They  make  and 
sell  the  ware  in  large  quantities  in  competition  with  the  licensed 
manufacturers.  Moreover,  if  the  experience  of  the  concerns 
which  had  the  right  to  use  the  patented  dredger  had  convinced 
them  that  the  ware  could  not  without  their  use  be  made  good 
enough  and  cheap  enough  to  be  sold  in  competition  with  them, 
it  is  not  conceivable  that  they  should  have  gone  to  all  the  trouble 
they  did  to  induce  those  two  concerns  to  take  licenses.  Accord- 
ing to  the  defendants'  present  theory,  the  refusal  to  do  so  was 
tantamount  to  commercial  suicide.  If  factories  without  licenses 
could  not  make  ware  which  could  be  sold  in  competition  with 
that  made  by  those  who  had  licenses,  the  fewer  who  had  licenses 
the  better  for  those  who  had. 

The  ware  is  absolutely  unpatented.  Any  one  may  sell  it 
as  freely  as  he  may  a  loaf  of  bread.  No  one  can  tell  by  looking 
at  a  bathtub  whether  enameled  powder  has  been  sprinkled  upon 
it  by  a  patent  dredger  any  more  than  any  one  who  eats  a  loaf  of 
bread  can  tell  whether  it  has  been  baked  in  an  oven  with  a 
patented  grate,  or  who  lights  a  kerosene  lamp  can  tell  whether 
in  the  process  of  refining  a  patented  tool  has  been  used,  or  by 
taking  a  pinch  of  snuff  can  be  sure  that  there  was  or  not  a 
patented  mill  used  in  grinding  the  tobacco. 

If  agreements  in  this  case  are  not  violations  of  the  Sherman 
Act,  similar  agreements  among  all  the  bakers  of  bread,  the  re- 
finers of  petroleum,  the  grinders  of  snuff  will  be  legal,  provided 
that  somewhere  in  the  process  of  making  the  bread,  refining  the 
petroleum,  or  grinding  the  snuff  a  patented  tool  has  been  used. 
The  issue  is  important.  It  cuts  deep.  The  record  squarely 
presents  it.  It  must  be  passed  upon.  The  defendants  say  they 
have  broken  no  law,  even  if  all  that  has  thus  far  been  said 
herein  be  true.     They  rely  upon  what  they  understand  to  have 


THE   BATHTUB   CASE  627 

been  decided  by  the  Circuit  Court  of  Appeals  of  tW^  Seventh 
Circuit  in  the  case  of  Rubber  Tire  Wheel  Co.  v.  Mihvaukee  R. 
IV.  Co.,  154  Fed.  358,  83  C.  C.  A.  336.  There  the  court  said 
that  no  one  can  use  a  patented  article  without  the  consent  of 
the  patentee.     He  may  fix  his  own  conditions.     It  adds  : 

Whatever  the  terms  the  courts  will  enforce  them  provided  only 
that  the  licensee  is  not  thereby  required  to  violate  some  law  outside 
of  the  patent  laws,  like  the  doing  of  murder  or  arson. 

The  defendants  ask :  "  Is  not  the  legal  title  to  the  dredger 
patents  in  Wayman  ?  "  "May  any  use  the  automatic  dredgers 
without  his  consent  .-*  "  "  May  he  not  make  what  terms  he  will 
for  his  license  to  use  them  ? "  *'  Will  not  the  courts  enforce 
those  terms,  provided  they  do  not  call  for  the  violation  of  some 
law  outside  the  patent  law,  like  murder  or  arson  ?  "  "  Have  the 
defendants  committed  murder  or  arson  or  anything  like  either?  " 
Making  a  price  agreement  differs  widely  in  many  fundamental 
respects  from  either  murder  or  arson.  The  difference  is  so  pro- 
found that  it  can  be  easier  felt  than  accurately  defined.  It  is 
not  to  be  found  in  the  circumstance  that  almost  all  races  of 
men  have  for  countless  centuries  felt  that  murder  and  arson 
were  highly  immoral  acts.  It  would  not  be  difficult  from  the 
text  of  the  criminal  codes  of  many  different  peoples  at  widely 
separated  periods  of  the  world's  history,  and  from  the  writings 
and  sayings  of  ethical  and  rehgious  teachers  of  divers  creeds 
and  races,  to  argue  that  for  some  thousands  of  years  the  vast 
majority  of  mankind  has  felt  that  it  was  also  immoral  to  make 
a  combination  for  the  purpose  of  raising  the  prices  of  things 
of  general  use.  At  all  times  there  has  been  a  minority  of 
shrewd  and  able  men  who  have  believed  that  such  combinations 
were  merely  the  reasonable  exercise  of  superior  sagacity  and 
foresight.  There  never  has  been  a  time  when  most  men, 
however  much  they  disliked  price  agreements  in  things  they 
bought,  but  did  not  sell,  were  not  able  to  persuade  themselves 
that  there  was  nothing  wrong  in  agreeing  to  keep  up  the  prices 
of  things  they  sold,  but  did  not  buy.  It  is  not  for  us  to  say 
what  the  true  ethical  relation  of  the  monopolist  to  the  commu- 
nity in  which  he   Uves  is.     In  this  country  those  who  believe 


628  TRUSTS,   POOLS   AND   CORPORATIONS 

that  he  is  a  dangerous  wrongdoer  have  in  lawful  manner  written 
their  convictions  upon  the  statute  book.  The  Sherman  Act 
forbids  restraint  of  interstate  trade  and  attempts  to  monopolize 
it.  He  who  does  either  may  be  punished,  and  that,  too,  in  a 
way  which  the  Legislature  seldom  directs,  unless  the  thing  for- 
bidden is  felt  by  the  majority  of  the  people  to  be  unethical  if 
not  highly  immoral.  The  use  by  the  Circuit  Court  of  Appeals 
of  the  Seventh  Circuit  of  murder  and  arson  as  illustrations  of 
breaches  of  law  which  a  patentee  had  no  greater  immunity  to 
commit  than  had  any  other  man  was  accurate,  natural,  and 
striking.  At  a  glance,  every  one  could  see  that  a  patentee 
could  not  lawfully  require  his  licensee  to  commit  either.  Un- 
fortunately some  people  have  persuaded  themselves  that  those 
illustrations  were  intended  as  limiting  the  violations  of  law 
which  a  patentee  could  not  require  to  crimes  which  the  ordinary 
man  feels  to  be  of  the  same  general  type  as  murder  and  arson. 
Such,  of  course,  was  not  the  intention  of  the  court. 

A  patentee  may  not  require  his  licensee  to  sell  a  patented  oil 
which  flashes  below  the  minimum  temperature  prescribed  by 
state  law.  Patterson  v.  Kentucky,  97  U.  S.  501,  24  L.  Ed.  11 15. 
He  may  not  authorize  his  licensee  to  prescribe  and  sell  his 
patented  medicine  in  a  state  which  requires  of  all  who  write  pre- 
scriptions that  they  shall  have  qualifications  not  possessed  by 
the  licensee.  Jordan  v.  Overseers  of  Dayton,  4  Ohio,  295. 
Selling  oil  with  a  low  flashing  point  or  prescribing  patent  med- 
icine without  having  a  state  license  to  practice  medicine  would 
no  more  strike  the  average  man  as  akin  to  murder  or  arson 
than  would  a  combination  to  fix  prices.  In  one  respect  they 
are  like  murder  and  arson.  They  are  violations  of  law  outside 
the  patent  laws.  So  is  a  combination  in  restraint  of  trade. 
What  the  court  meant  was  what  the  court  said  —  a  patentee 
cannot  require  his  licensee  to  violate  a  law  outside  of  the  patent 
law.  Murder  and  arson  are  outside  the  patent  law.  Every 
obligation  which  a  patentee  attempts  to  impose  upon  his  li- 
censee to  break  any  law  outside  of  the  patent  law  is  in  that 
respect  like  a  requirement  to  commit  murder  or  arson.  In  the 
nature  of  things  such  must  be  the  law.  A  patentee  is  as  much 
subject  to  the  laws  of  the  land  as  is  any  other  man.     From  one 


THE    RATHTUP>   CASE  629 

special  application  of  one  class  of  laws  he  is  exemiDtU-*  At  com- 
mon law  and  by  statute  monopolies  are  unlawful.  At  common 
law  and  by  statute  a  man  who  invented  a  new  and  useful  thing 
might  be  given  a  right  which  would  enable  him  for  a  limited 
time  effectually  to  monopolize  it.  The  courts  have  said  that 
this  right  to  monopolize  what  he  invented  cannot  be  taken  from 
a  patentee  by  state  laws.  They  say  it  has  not  been  taken 
away  by  Congress.  All  men  know  that  Congress  never  in- 
tended when  it  passed  the  Sherman  Act  to  change  the  patent 
law.     It  did  not  do  so. 

The  patentee  may,  in  spite  of  that  law,  monopolize  for  the 
term  of  his  patent  the  thing  which  he  or  his  assignor  invented. 
Neither  at  common  law  nor  in  this  country  by  statute  has  he 
ever  had  a  right  to  monopolize  anything  else.  As  to  everything 
not  validly  claimed  in  his  patent  he  is  as  other  men.  If  by  the 
common  law  or  the  statutes  of  the  state  or  by  the  enactments  of 
Congress  men  are  forbidden  to  restrain  trade  or  to  monopolize 
it,  a  patentee  may  not  restrain  trade  or  attempt  to  monopolize  it 
in  anything  except  that  which  is  covered  by  his  patent. 

[8]  A  patent  is  a  grant  of  a  right  to  exclude  all  others  from 
making,  using,  or  selling  the  invention  covered  by  it.  It  does 
not  give  a  right  to  the  patentee  to  sell  indulgences  to  violate  the 
law  of  the  land,  be  it  the  Sherman  Act  or  another.  The  right 
to  exclude  others  is  the  property  of  the  patentee.  It  is  his  very 
own.  He  may  do  with  it  as  he  will.  A  very  rich  man  may 
have  $100,000,000  of  cash.  It  is  his  property.  It  is  his  very 
own.  He  may  do  with  it  as  he  will.  Neither  one  of  them  can 
use  his  property  to  bring  about  a  violation  of  law.  A  patentee 
who  monopolizes  his  invention  breaks  no  law.  He  who  uses 
his  property  right  to  exclude  others  from  the  making,  selling,  or 
using  his  invention,  for  the  purpose  and  with  the  effect  of  mak- 
ing a  combination  to  restrain  trade  in  something  from  which  his 
patent  gives  him  no  right  to  exclude  others,  does  break  the  law. 
He  breaks  it  precisely  as  the  individual  defendants  in  the 
Standard  Oil  and  American  Tobacco  companies  broke  it.  They 
had  the  same  right  to  use  their  brains,  their  capital,  and  their 
credit  as  they  thought  best,  as  he  had  to  use  his  right  to  exclude 
all  others  from  making,  using,  or   selling  automatic    dredgers. 


630  TRUSTS,   POOLS  AND   CORPORATIONS 

He  was  subject  to  the  same  limitations  as  they  were.  They 
could  not  lawfully  use  their  brains,  their  money,  and  their  credit 
to  restrain  trade  in  petroleum  and  tobacco.  He  cannot  use  his 
patent  rights  to  restrain  trade  in  unpatented  bathtubs. 

The  defendants  have  pressed  upon  our  attention  many  cases 
in  the  Circuit  Courts  and  in  the  Circuit  Courts  of  Appeal. 
Many  of  them  have  upheld  the  right  of  a  patentee  to  fix  the 
price  below  which  a  purchaser  from  him  of  patented  articles 
may  not  sell  those  articles.  In  some  of  these  cases  it  has  been 
held  that  one  who  sells  at  a  lower  price  thereby  becomes  an  in- 
fringer, and  that  the  federal  courts  have  jurisdiction  of  a  suit 
brought  against  him  on  account  of  such  sale,  irrespective  of  the 
amount  in  controversy  or  the  citizenship  of  the  parties.  The 
Supreme  Court  has  in  several  recent  cases  expressly  said  that  it 
was  not  to  be  understood  as  expressing  any  opinion  as  to  whether 
such  restrictions  when  applied  to  patented  articles  were  or  were 
not  valid.  Wayman  did  not  sell  patented  dredgers  on  condition 
that  the  purchasers  should  not  resell  them  below  a  fixed  price. 
The  question  of  whether  such  restrictions  upon  the  sale  of 
patented  articles  are  valid  is  not  before  us.  We  neither  decide 
it  nor  intimate  any  opinion  upon  it. 

In  a  number  of  cases  the  owner  of  a  machine  patent  has 
licensed  others  to  use  the  machine  on  condition  that  they  would 
buy  certain  unpatented  things  upon  which  the  machine  operated 
exclusively  from  the  patentee.  Those  conditions  have  been 
held  valid  by  a  number  of  courts.  Persons  who  with  the  knowl- 
edge of  the  terms  of  the  license  have  sold  to  the  licensee  some 
of  the  unpatented  things  to  be  used  on  the  patented  machine 
have  been  held  liable  for  contributory  infringement.  A  pat- 
entee may  or  may  not  be  entitled  to  obtain  his  pay  for  his  patented 
machine  in  whole  or  in  part  by  stipulating  that  he  shall  have 
the  sole  right  to  furnish  material  to  be  used  with  it.  We  express 
no  opinion  upon  the  question.  It  would  have  been  presented  in 
this  case  had  Wayman  bargained  with  the  corporate  defendants 
that  they  should  buy  all  their  enameling  powder  from  him. 
Such  a  bargain  would  have  been  a  very  different  one  from 
that  now  before  us.  The  purposes  aimed  at  by  such  a  bargain, 
the    relations  among  the  defendants,  and    between    them    and 


THE   BATHTUB   CASE  631 

the  public  would  have  all  been  unlike  those  shewn  in  the 
record. 

What  has  been  said  is  sufficient  for  the  determination  of  this 
case.  The  ware  is  not  patented.  The  agreements  or  licenses 
attempt  to  fix  the  price  of  unpatented  ware  and  to  monopolize 
the  trade  in  it.  The  fact  that  Wayman  had  a  patent  on  some- 
thing else,  even  though  it  was  a  tool  used  in  one  step  of  the 
making  of  the  ware,  gives  neither  him  nor  his  licensees  the 
right  to  restrain  interstate  trade  in  the  ware.  The  ownership  of 
a  patent  for  a  tool  by  which  old,  well-known,  and  unpatented 
articles  of  general  use  can  be  more  cheaply  made  gives  no  right 
to  combine  the  makers  and  dealers  in  the  unpatented  articles 
in  an  agreement  to  make  the  pubHc  pay  more  for  it.  The  first 
and  second  sections  of  the  Sherman  Act,  "  when  taken  together, 
embraced  every  conceivable  act  which  could  possibly  come 
within  the  spirit  or  purpose  of  the  prohibitions  of  the  law  with- 
out regard  to  the  garb  in  which  such  acts  were  clothed.  .  .  . 
In  view  of  the  general  language  of  the  statute  and  of  the  public 
policy  which  it  manifested,  there  was  no  possibility  of  frustrating 
that  policy  by  resorting  to  any  disguise  or  subterfuge  of  form, 
since  resort  to  reason  rendered  it  impossible  to  escape  by  any 
indirection  the  prohibitions  of  the  statute."  United  States  v. 
American  Tobacco  Co.,  221  U.  S.  181,  31  Sup.  Ct.  648,  55  L. 
Ed.  694.  In  what  has  been  said  it  has  been  assumed  that 
Wayman  was  the  real  and  substantial  owner  of  the  patents. 
That  scheme  was  his.  That  his  purpose  was  merely  to  make 
money  for  himself  by  selling  to  the  corporate  defendants  in- 
dulgences to  sin  against  the  Sherman  Act. 

The  government  contends  that  this  was  not  the  real  situation. 
In  its  view  there  is  nothing  before  the  court  except  an  ordinary 
combination  to  raise  and  maintain  wholesale  and  retail  prices 
and  to  force  all  the  makers  and  dealers  in  the  country  into  it. 
Wayman,  it  says,  was  nothing  more  than  the  ordinary  promoter. 
The  patent  served  the  purpose  of  the  certificate  of  incorporation 
from  New  Jersey  or  Delaware  used  when  the  combination 
became  a  consolidation.  We  have  not  discussed  this  branch  of 
the  case.  We  will  not.  We  refrain  from  doing  so  not  because 
it  would  not  be  pertinent.     It  would.     Ordinarily  it  would  receive 


632  TRUSTS,    POOLS   AND   CORPORATIONS 

full  consideration.  Unusual  circumstances  shown  by  the  record 
make  it  inexpedient  and  even  improper  to  do  so,  if  the  case  can 
be  disposed  of  without  commenting  upon  that  aspect  of  it. 

[5]  Some  months  after  these  proceedings  were  begun  the 
grand  jury  of  the  United  States  for  the  Eastern  District  of 
Michigan  returned  indictments  against  many  of  the  defendants. 
They  were  charged  with  violating  the  Sherman  Law.  The  acts 
alleged  against  them  there  are  the  same  which  are  made  the 
ground  of  the  equitable  relief  here  asked  for.  The  defendants 
have  moved  that  further  proceedings  herein  be  put  off  until  the 
criminal  case  has  been  finally  disposed  of,  and  that  the  taking 
of  testimony  be  then  reopened.  It  is  urged  that  the  individual 
defendants  should  in  justice  to  themselves  testify  fully  and 
freely.  It  is  said  that  this  they  dare  not  now  do.  They  fear 
that  something  to  which  they  swear  in  the  civil  proceeding  may 
be  used  in  the  criminal  to  their  hurt.  This  motion  we  cannot 
grant.  The  Sherman  Act  provides  for  both  civil  and  criminal 
proceedings.  The  Attorney-General  must  decide  whether  and 
when  either  or  both  shall  be  brought.  To  postpone  finding  an 
indictment  until  after  a  petition  for  an  injunction  had  upon  final 
hearing  been  granted  or  dismissed  would  be  frequently,  if  not 
usually,  to  wait  until  after  the  period  of  limitations  had  expired. 
To  refuse  to  decide  the  equity  cause  so  long  as  the  criminal 
charge  had  not  been  finally  disposed  of  might  leave  the  public  to 
suffer  for  years  from  what  the  Attorney-General  believed  to  be 
a  harmful  interference  with  its  rights  and  interests.  The 
courts  cannot,  unless  in  exceptional  cases,  say  that  either  must 
wait  upon  the  other.  A  court  of  equity  has  a  wide  discretion. 
There  may  be  circumstances  which  would  justify  its  refusal 
finally  to  act  until  after  the  indictments  had  been  tried.  In  our 
view  such  circumstances  are  not  found  here.  The  fact  that 
many  of  the  defendants  are  now  under  indictment  makes  it  our 
duty  to  be  careful  not  to  say  anything  which  might  be  used 
either  to  their  prejudice  or  to  that  of  the  government  in  the 
impending  criminal  trial.  Some  minor  questions  affecting  par- 
ticular defendants  are  to  be  passed  upon. 

[6]  The  Colwell  Lead  Company  says  it  is  not  engaged  in 
interstate  commerce.     In  our  view  it  is.     It  makes  its  ware  in 


THE    BATHTUB   CASE  633 

New  Jersey.  It  sends  it  to  warerooms  in  New  York  City  and 
in  Worcester,  Mass.,  and  there  sells  it.  Its  trade  extends  over 
several  states.  It  alleges  that  it  had  no  part  in  any  of  the 
negotiations  leading  up  to  the  formation  of  the  scheme,  that  it 
did  not  execute  a  license  agreement  until  some  three  weeks 
after  the  other  corporate  defendants,  and  that,  then,  it  refused 
to  bind  itself  to  charge  the  resale  prices.  It  was  consulted 
through  its  president  some  time  before  any  of  the  agreements 
were  actually  entered  into  or  before  their  precise  terms  were 
definitely  settled.  He  then  gave  a  general  approval  of  the 
plan.  Neither  he  nor  it  appear  to  have  done  anything  further 
until  after  the  others  had  signed  up. 

Some  months  before  the  Standard  Sanitary  Manufacturing 
Company,  which  until  May  4,  19 10,  owned  the  basic  automatic 
patent,  had  given  the  Colwell  company  a  revocable  license  to 
use  the  dredger.  The  latter  wanted  Wayman  to  renew  the 
license.  It  apparently  did  not  want  it  badly  enough  to  be 
willing  to  bind  itself  to  charge  the  uniform  resale  prices  of  the 
New  York  City  plumbers  to  whom  it  sold  a  large  part  of  the 
ware.  Wayman  finally  agreed  in  writing  that,  if  it  would  take  a 
license,  he  would  try  to  get  from  the  commission  of  the  corpo- 
rate defendants  leave  to  cut  these  prices  whenever  it  found 
that  maintaining  them  would  seriously  handicap  it.  If  the 
commission  would  not  let  the  Colwell  Lead  Company  do  so,  the 
latter  on  10  days'  notice  could  terminate  the  agreement.  It 
would  appear  that  it  became  a  party  to  the  combination  to 
an  extent  sufficient  to  entitle  the  government  to  injunctive  relief 
against  it. 

[7]  The  evidence  shows  that  two  of  the  individual  defendants, 
namely,  Bert  O.  Tilden  and  George  W.  Franzheim,  secretaries 
of  the  Colwell  Lead  and  the  Wheeling  Enameled  Iron  com- 
panies, respectively,  had  no  part  in  forming  the  combination. 
They  did  not  do  anything  in  connection  with  it,  except  to  attest 
in  their  official  characters  papers  executed  by  their  corporations. 
As  to  them  the  petition  should  be  dismissed.  Against  the 
other  defendants,  corporate  and  individual,  the  government  is 
entitled  to  injunctive  relief  substantially  as  prayed  for.  In 
view  of  the  pendency  of  the  criminal  case,  all  characterization 


634  TRUSTS,    POOLS  AND   CORPORATIONS 

of  what  the  defendants  have  done  not  necessary  to  the  effec- 
tiveness of  the  decree  should  be  omitted  from  it. 

Goff,  Circuit  Judge  {dissenting). 

I  cannot  assent  to  the  conclusion  reached  by  the  court  in  this 
opinion.  The  facts  established  by  the  testimony,  considered  in 
the  Hght  of  the  law  applicable  thereto,  compel  me  to  conclude 
that  the  allegations  of  the  petition  have  not  been  sustained. 


THE    INTERNATIONAL    HARVESTER    CASE  i 
A  Well-Behaved  Combination 
"  This  case  is  one  of  fact,  not  of  controverted  questions  of  law." 

On  June  24,  1902,  P.  D.  Middlekatiff  secured,  in  his  own 
name,  an  option  on  the  stock  and  plant  of  the  Milwaukee  Har- 
vester Company  for  $3,123,691.90.  He  did  this  in  fact  as  agent, 
though  it  does  not  clearly  and  certainly  appear  who  his  principal 
was,  whether  J.  P.  Morgan  &  Co.,  George  W.  Perkins,  or  the 
McCormick  Harvesting  Machine  Company.  He  did  it,  how- 
ever, at  the  direct  instance  of  the  McCormick  Harvesting 
Machine  Company,  but  whether  it  was  acting  as  principal  or 
agent  is  left  in  some  slight  doubt. 

On  June  25,  1902,  Mr.  Middlekauff  went  to  New  York  with  a 
letter  from  an  officer  of  the  McCormick  company,  authorizing 
him  to  assign  this  option  to  J.  P.  Morgan  &  Co.,  of  which 
George  W.  Perkins  was  a  member,  or  to  any  one  they  might 
designate,  and  reciting  that  the  option  had  been  obtained  "  for 
us."  Mr.  Middlekauff  remained  in  New  York  until  July  30, 
1902,  aside  from  being  absent  a  small  portion  of  the  time  in 
Philadelphia  and  Washington  on  busines  for  Mr.  Perkins. 

On  August  1 1,  1902,  a  new  contract  was  made  for  the  purchase 
of  the  Milwaukee  Harvester  plant  by  Mr.  Middlekauff,  and  on  the 
same  day  he  assigned  his  contract  to  Mr.  William  C.  Lane,  a  New 
York  banker  and  then  president  of  the  Standard  Trust  Company. 

1  U.  S.  V.  Int.  Flarv.  Co.;  District  Court;  214  Fed.  Rep.  987;  decided 
August  12,  1914.  Economic  details  in  chapter  IX,  supra.  Many  omissions  not 
indicated. 


THE   INTERNATIONAL   HARVESTER   CASE  635 

In  July,  1902,  the  representatives  of  the  McCamnick,  the 
Deering,  the  Warder,  Bushnell  &  Glessner,  and  the  Piano  were 
all  in  New  York,  but  stopping  at  different  hotels  and  not  seeing 
one  another.  They  were  all  seeing,  however,  Mr.  George  W. 
Perkins.  On  July  28,  1902,  they  met  and  gave  separate  con- 
tracts to  William  C.  Lane,  heretofore  referred  to,  and  his  assigns, 
to  sell  all  their  tangible  property  and  specified  portions  of  their 
bills  receivable.  These  agreements  all  contained  a  recital  that 
the  purchaser,  upon  his  acquisition  of  the  property,  intended  to 
transfer  the  same  to  a  corporation  to  be  organized  under  the 
laws  of  Illinois,  or  some  other  state,  called  the  "  purchasing 
company."  It  was  in  each  case,  except  that  of  the  Warder, 
Bushnell  &  Glessner  Company,  stipulated  that  the  entire  pur- 
chase price  should  be  paid  in  fully  paid  non-assessable  stock  of 
the  purchasing  company. 

On  August  II,  1902,  the  companies  all  signed  an  agreement 
for  the  immediate  delivery  of  their  plants  and  property,  without 
waiting  for  any  appraisement  theretofore  stipulated  for  in  each 
instance. 

On  August  12,  1902,  the  very  day  of  the  organization  of  the 
International  Harvester  Company  with  a  total  capital  of  ^120,- 
000,000,  Mr,  Lane  appeared  before  the  board  of  directors  and 
offered  to  sell  the  Milwaukee  Harvester  Company  plant  as  a 
going  concern,  including  its  bills  receivable  and  the  plants  of 
the  McCormick  Harvesting  Machine  Company,  the  Deering 
Harvester  Company,  the  Piano  Manufacturing  Company,  and 
the  Warder,  Bushnell  &  Glessner  Company,  and  to  furnish  ^60,- 
000,000  of  working  capital,  to  be  represented  by  accounts  and 
bills  receivable  of  the  McCormick  Harvesting  Machine  Com- 
pany, the  Deering  Harvester  Company  and  the  Piano  Manu- 
facturing Company,  or  in  cash,  for  the  $120,000,000  of  the 
capital  stock  of  the  company,  and  on  August  13,  1902,  this 
proposition  was  accepted.  The  property  turned  in  was  of 
greater  value  than  the  stock  issued  for  it  This  case,  therefore, 
involves  no  question  of  overcapitalization. 

In  pursuance  of  this  agreement  there  was  turned  over  to  the 
company  $40,000,000  of  the  bills  receivable  of  the  McCormick 
Harvesting  Machine   Company,  the   Deering   Harvester   Com- 


636  TRUSTS,    POOLS   AND    CORPORATIONS 

pany,  and  the  Piano  Manufacturing  Company,  guaranteed  by 
them,  respectively.  In  all  Mr.  Lane  did  in  this  matter  he  was 
acting  upon  the  suggestion  of  his  counsel,  Messrs.  Guthrie, 
Cravath  &  Henderson.  He  was  compensated,  but  there  never 
was  any  idea  upon  his  part  that  he  owned  any  of  the  properties. 
He  was  a  mere  conduit  or  instrumentality  in  the  transaction. 

The  International  company  shortly  acquired  all  the  stock  of 
the  Milwaukee  Harvester  Company,  as  it  had  already  acquired 
the  plant.  It  reduced  the  capital  of  the  Milwaukee  Harvester 
Company  to  $r, 000,000,  and  changed  the  name  to  the  Interna- 
tional Harvester  Company  of  America,  hereafter  called  the 
America  company.  It  was  for  a  considerable  time  officered  by 
the  same  men  who  held  the  offices  in  the  International  com- 
pany. A  contract  was  entered  into  between  the  International 
company  and  the  America  company  by  which  the  former  con- 
tracted to  sell  to  the  latter  its  entire  output  and  the  latter  under- 
took the  responsibilities  of  reselling  the  same.  The  America 
company,  in  addition  to  buying  the  manufactured  products  of 
the  International,  bought  from  outside  parties  some  threshers, 
wagons,  plows,  etc.,  and  resold  them;  but  the  dealing  in  all 
property  not  the  product  of  the  International  company  only 
amounts  to  about  2^  per  cent  of  its  business.  All  the  stock  of 
the  America  company  is  still  the  property  of  the  International 
company. 

The  two  defendant  railroads  are  switching  roads  to  the  facto- 
ries of  the  International  company ;  one  acquired  in  the  con- 
solidation mentioned,  and  one  constructed  by  the  new  company. 
The  International  Flax  Twine  Company,  the  Wisconsin  Steel 
Company,  and  the  Wisconsin  Lumber  Company  are  auxiliary 
companies  of  the  International  company,  and  the  personal 
defendants  are  officers  and  directors  of  the  last-named  company. 

It  is  alleged  in  the  petition  that  these  five  companies  produced 
over  85  per  cent  of  all  harvesting  machinery  sold  in  the  United 
States,  and  it  is  admitted  in  the  answer  that  the  said  companies 
produced  approximately  80  to  85  per  cent  of  the  binders,  mow- 
ers, reapers,  and  rakes. 

In  January  following  the  consolidation  of  the  five  companies, 
the  International  company  acquired  the   D.  M.  Osborne  &  Co. 


THE    INTF.RNAriONAL    HARVKSTKR    CASE  637 

stock,  and  the  companies  thus  combined  manufacUited  a  still 
greater  percentage  of  the  harvesting  machinery  used  in  the 
United  States  and  nearly  the  whole  of  that  exported  from  the 
United  States.  The  five  companies  except  the  Milwaukee  com- 
pany all  took  stock  in  the  new  company,  and  with  the  exception 
of  the  Warder,  Bushnell  &  Glessner  Company  took  stock  for 
the  entire  amount  of  property  turned  over  bv  them,  and  this 
amounted  to  S93,40O,cxxD  of  the  Si 20,000,000  capital  of  the  new 
company.  $6,600,000  of  the  capital  of  the  new  company  was 
paid  to  J.  P.  Morgan  &  Co.,  of  which  $3,148,196.66  was  for  the 
Milwaukee  Harvester  Company's  property  and  business,  and 
$3,451,803.34  was  for  services  and  expenses  in  connection  with 
the  organization  of  the  International  company.  Thus  $1,000.- 
000  of  the  capital  of  the  new  company  was  clearly  covered, 
without  any  new  or  additional  working  capital.  By  agreement 
among  all  the  parties  who  were  to  receive  shares  of  stock  in  the 
International,  all  the  stock  except  enough  to  qualify  directors 
was  vested  in  voting  trustees,  namely,  George  W.  Perkins,  Cvrus 
H.  McCormick,  president  of  the  McCorniick  Harvesting  Machine 
Company,  and  Charles  Deering,  of  the  Deering  Harvester 
Company.     These  voting  trustees  were  maintained  for  ten  years. 

The  day  of  the  transfer  to  the  International  Harvester  Com- 
pany of  the  five  plants,  Cyrus  H.  McCormick,  Harold  F. 
McCormick,  Stanley  McCormick,  all  of  the  McCormick  Har- 
vesting Machine  Company,  and  Cyrus  Bentley,  the  Chicago 
attorney  of  the  company,  Charles  Deering,  William  Deering, 
James  Deering,  and  Richard  F.  Howe,  all  of  the  Deering  Har- 
vester Company,  and  John  J.  Glessner,  of  the  Warder,  Bushnell 
&  Glessner  Company,  and  William  H.  Jones,  of  the  Piano 
Manufacturing  Company,  were  all  chosen  directors  of  the 
International  Har\-ester  Company  and  constituted  the  majority 
of  the  board. 

When  the  D.  M.  Osborne  &  Co.  purchase  was  made,  while 
the  International  bought  all  the  stock,  it  permitted  the  Osborne 
company  to  continue  to  appear  to  be  independent.  It  is  claimed 
that  this  was  done  to  enable  the  Osborne  to  collect  its  bills 
receivable,  which  were  not  acquired  by  the  International.  There 
was  commercial  advantaire  in  claiming  not  to  be  associated  with 


638  TRUSTS,    POOLS   AND    CORPORATIONS 

the  International.  Many  persons  were  opposed  to  buying  from 
it,  and  for  two  years  the  Osborne  company  persistently  adver- 
tised that  it  was  independent. 

While  under  the  old-time  law  of  warranty  it  might  be  justi- 
fiable for  the  Osborne  company  to  conceal  its  relations  with  the 
International,  there  can  be  no  excuse  for  the  affirmation  upon 
its  part  that  it  was  independent  after  it  had  been  acquired  by 
the  International. 

The  seller  may  let  the  buyer  cheat  himself  ad  libitmft,  but  must  not 
actively  assist  him  in  cheating  himself,  i  Parsons  on  Contracts  (9th 
Ed.),  page  615. 

The  International  had  bought  all  the  stock  of  the  Osborne 
company,  and  it  had  been  transferred  to  a  trustee  for  it,  and 
there  was,  in  the  fact  that  the  Osborne  company  might  better 
collect  its  bills  receivable,  no  basis  to  justify  the  International 
in  making  a  contract  under  which  the  Osborne  company  could 
continue  to  advertise  falsely  that  it  was  an  independent  concern, 
when  it  had  in  fact  been  merged  with  the  International.  It  is 
safe  to  say  that  from  January,  1903,  the  competition  of  the 
Osborne  company  was  in  name  only  and  did  not  exist  in  fact. 

What  has  been  said  of  the  Osborne  purchase  is  true  in  princi- 
ple of  purchases  made  by  the  International  of  the  Keystone 
company,  the  Minnie  Harvester  Company,  and  the  Aultman- 
Miller  plant. 

Prior  to  the  consolidation  the  first  five  companies  were  in 
fierce  competition  for  trade,  and  especially  was  this  true  of  the 
McCormick  and  the  Deering  companies,  and  this  competition 
extended,  not  only  to  price,  but  to  the  granting  of  expert  assist- 
ance and  numerous  free  items  wdth  machines.  The  result  of 
the  combination  was  that  all  this  competition  at  once  wholly 
ceased,  except  within  the  limitation  of  agents'  commissions. 

The  defendants  claim  that  the  objects  of  the  organization 
were : 

First,  to  build  up  the  foreign  trade ; 

Second,  by  the  combination  to  secure  more  capital  to  enable 
them  to  continue  the  battle  in  the  foreign  market ; 

Third,  by  enlarging  the  scope  of  the  business  so  as  to  include 


THE    INTERNATIONAL   HARVESTER   CASE  639 

other  lines  of  agricultural  implements  to  make  an  aJLl^he-year- 
around  business ; 

—  and  that  it   was  not  the  intention  to  oppress  the  domestic 
market,  and  that  they  have  not  done  so. 

It  does  appear  that  since  the  combination  the  foreign  trade 
has  been  greatly  increased.  This  trade  of  all  the  combining 
companies  was  $10,400,000  in  1902,  and  has  grown  under  the 
defendants'  management  to  $50,000,000  in  191 2.  This  vast 
growth  is  to  the  credit  of  the  energy  and  enterprise  of  the  de- 
fendants. But  the  growth  of  the  trade  of  the  companies  who 
formed  the  combination  was  at  the  time  of  the  consohdation 
very  recent,  and  the  trade  was  rapidly  increasing  just  prior  to  the 
combination.  With  the  knowledge  that  the  foreign  trade  was 
making  such  a  remarkable  growth  at  the  time  of  the  consolida- 
tion, whether  the  separate  companies  would  have  increased  their 
business  as  much  as  the  defendants  have  done  is  a  mere  matter 
of  speculation,  on  which  we  can  venture  no  opinion. 

It  is  claimed  that  the  consolidation  brought  $60,000,000  of 
available  cash  to  the  new  company  with  which  to  expand  the 
foreign  trade.  This  is  not  true.  The  government  claims  that 
not  more  than  $10,000,000  of  new  cash  was  furnished,  but  in  no 
event  did  it  exceed  $20,000,000.  Forty  million  dollars  of  this 
so-called  working  capital  was  furnished  in  bills  receivable  of  the 
old  companies,  just  as  available  to  the  old  companies  as  to  the 
new ;  and  $60,000,000  was  issued  for  the  tangible  property  of 
the  old  companies  and  the  expenses  of  J.  P.  Morgan  &  Co.  in 
connection  with  the  organization  of  the  new  company,  and  for 
the  Milwaukee  company. 

Soon  the  International  began  buying  and  constructing  plants 
to  extend  its  business  from  the  prior  one  of  the  manufacture 
of  harvesting  machinery  to  the  manufacture  of  all  of  the  five 
classes  of  agricultural  implements  heretofore  referred  to.  Con- 
sequently a  distinction  is  drawn  in  argument  between  what  are 
called  the  old  lines  and  the  new. 

It  is  contended  by  the  government  that  the  International  used 
its  prior  monopoly  of  the  old  lines  to  impose  its  new  lines  upon 
dealers  and  it  includes  this  among  numerous  charges  of  oppres- 
sion upon  purchasers. 


640  TRUSTS,    POOLS   AND   CORPORATIONS 

While  the  evidence  shows  some  instances  of  attempted  op- 
pression of  the  American  trade  by  the  International  and  the 
American  companies,  such  cases  are  sporadic,  and  in  general 
their  treatment  of  their  smaller  competitors  has  been  fair  and 
just,  and  if  the  International  and  American  companies  were 
not  in  themselves  unlawful,  there  is  nothing  in  the  history  of 
the  expanding  of  the  lines  of  manufacture,  so  as  to  make  an  all- 
the-year-around  business,  that  could  be  condemned. 

[i]  The  real  question  is  whether  the  combination  of  the 
companies  was  illegal  in  the  beginning,  or  became  so  with  the 
additions  subsequently  made. 

This  court  is  clearly  of  the  opinion  that  the  process  by  which 
it  was  made  to  appear  that  the  properties  were  sold  to  Lane 
was  merely  colorable. 

[2]  No  weight  is  attached  therefore  to  the  means  by  which 
the  combination  was  formed  if  a  combination  within  the  purview 
of  the  statute  was  created.  That  it  was  a  combination  of  five 
companies  is  clear.  The  fact  that  this  combination  took  the 
form  of  a  new  corporation  is  immaterial. 

Was  this  combination  in  restraint  of  trade  ?  It  substantially 
suppressed  all  competition  between  the  five  companies,  and  the 
restraint  of  competition  between  combining  companies  is  as  illegal 
as  destruction  of  competition  between  them  without  combining. 

In  United  States  v.  E.  I.  Du  Pont  De  Nemours  &•  Co.,  it  is  said  : 

While  all  this  is  true,  the  recent  decisions  of  the  Supreme  Court 
make  it  equally  clear  that  a  combination  cannot  escape  the  condemna- 
tion of  the  Anti-Trust  Act  merely  by  the  form  it  assumes  or  by  the 
dress  it  wears.  It  matters  not  whether  the  combination  be  "  in  the 
form  of  a  trust  or  otherwise,"  whether  it  be  in  the  form  of  a  trade 
association  or  a  corporation,  if  it  arbitrarily  uses  its  power  to  force 
weaker  competitors  out  of  business,  or  to  coerce  them  into  a  sale 
to  or  union  with  the  combination,  it  puts  a  restraint  upon  interstate 
commerce,  and  monopolizes  or  attempts  to  monopolize  a  part  of  that 
commerce,  in  a  sense  that  violates  the  Anti-Trust  Act. 

In  United  States  v.  American  Tobacco  Co.,  221  U.  S.  106, 
179,  31  Sup.  Ct.  632,  648  (55  L.  Ed.  663),  it  is  said  : 

Applying  the  rule  of  reason  to  the  construction  of  the  statute,  it 
was  held  in  the  Standard  Oil  Case  that  as  the  words  "  restraint  of 


THE    INTERNATIONAL    HARVESTER   CASE  641 

trade  "  at  common  law  and  in  the  law  of  this  country  ajUthe  time  of 
the  adoption  of  the  Anti-Trust  Act  only  embraced  acts  or  contracts 
or  agreements  or  combinations  which  operated  to  the  prejudice  of  the 
public  interests  by  unduly  restricting  competition  or  unduly  obstruct- 
ing the  due  course  of  trade,  or  which,  either  because  of  their  inherent 
nature  or  effect,  or  because  of  the  evident  purpose  of  the  acts,  etc., 
injuriously  restrained  trade,  that  the  words  as  used  in  the  statute  were 
designed  to  have  and  did  have  but  a  like  significance.  It  was  there- 
fore pointed  out  that  the  statute  did  not  forbid  or  restrain  the  power 
to  make  normal  and  usual  contracts  to  further  trade  by  resorting  to 
all  normal  methods,  whether  by  agreement  or  otherwise,  to  accom- 
plish such  purpose.  In  other  words,  it  was  held,  not  that  acts  which 
the  statute  prohibited  could  be  removed  from  the  control  of  its  pro- 
hibitions by  a  finding  that  they  were  reasonable,  but  that  the  duty  to 
interpret,  which  inevitably  arose  from  the  general  character  of  the 
term  "  restraint  of  trade  "  required  that  the  words  "  restraint  of  trade  " 
should  be  given  a  meaning  which  would  not  destroy  the  individual 
right  to  contract  and  render  difficult,  if  not  impossible,  any  movement 
of  trade  in  the  channels  of  interstate  commerce  —  the  free  movement  of 
which  it  was  the  purpose  of  the  statute  to  protect.  The  soundness 
of  the  rule  that  the  statute  should  receive  a  reasonable  construction, 
after  further  mature  deliberation,  we  see  no  reason  to  doubt.  Indeed, 
the  necessity  for  not  departing  in  this  case  from  the  standard  of  the 
rule  of  reason  which  is  universal  in  its  application  is  so  plainly  re- 
quired in  order  to  give  effect  to  the  remedial  purposes  which  the  act 
under  consideration  contemplates,  and  to  prevent  that  act  from  de- 
stroying all  liberty  of  contract  and  all  substantial  right  to  trade,  and 
thus  causing  the  act  to  be  at  war  with  itself  by  annihilating  the  fun- 
damental right  of  freedom  to  trade,  which,  on  the  very  face  of  the 
act,  it  was  enacted  to  preserve,  is  illustrated  by  the  record  before  us. 
In  truth,  the  plain  demonstration  which  this  record  gives  of  the  in- 
jury which  would  arise  from  and  the  promotion  of  the  wrongs  which 
the  statute  was  intended  to  guard  against,  which  would  result  from 
giving  to  the  statute  a  narrow,  unreasoning,  and  unheard  of  construc- 
tion, as  illustrated  by  the  record  before  us,  if  possible,  serves  to 
strengthen  our  conviction  as  to  the  correctness  of  the  rule  of  construc- 
tion, the  rule  of  reason,  which  was  applied  in  the  Standard  Oil  Case, 
the  application  of  which  rule  to  the  statute  we  now,  in  the  most  un- 
equivocal terms,  re-express  and  reaffirm. 

[3]  Suppression  of  competition,  where  the  parties  to  a  com- 
bination control  a  large  portion  of  the  interstate  or  foreign  com- 


642  TRUSTS,   POOLS  AND   CORPORATIONS 

merce  in  the  articles,  and  where  there  is  no  obligation  to  form 
the  combination  arising  out  of  the  fact  that  the  parties  to  the 
same  are  losing  money,  or  the  like,  has  been  held  an  undue 
restraint  of  trade. 

[4]  We  think  it  may  be  laid  down  as  a  general  rule  that  if 
companies  could  not  make  a  legal  contract  as  to  prices  or  as  to 
collateral  services  they  could  not  legally  unite,  and  as  the  com- 
panies named  did  in  effect  unite  the  sole  question  is  as  to  whether 
they  would  have  agreed  on  prices  and  what  collateral  services 
they  could  render,  when  their  companies  were  all  prosperous 
and  they  jointly  controlled  80  to  85  per  cent  of  the  business  in 
that  line  in  the  United  States.  We  think  they  could  not  have 
made  such  an  agreement. 

If  the  five  companies  which  formed  the  International  had  been 
small,  and  their  combination  had  been  essential  to  enable  them 
to  compete  with  large  corporations  in  the  same  line,  then  their 
uniting  would,  in  the  light  of  reason,  not  have  been  in  restraint 
of  trade,  but  in  the  furtherance  of  it ;  but  when  they  constituted 
the  largest  manufacturers  of  their  articles  in  America,  if  not  in 
the  world,  and  held  jointly  about  80  to  85  per  cent  of  the  trade, 
and  two  at  least  of  the  companies  forming  the  combination  were 
prosperous,  their  combining  was,  when  similarly  viewed,  an 
unreasonable  restraint  of  trade.  If  the  business  of  the  separate 
companies  combining  was  unsuccessful,  it  could  be  claimed  that 
their  combination  was  reasonable,  in  view  of  the  rule  of  reason 
as  proclaimed  by  the  Supreme  Court;  but  it  is  conceded  that 
the  McCormick  and  the  Deering  companies  "had  estabhshed 
reasonably  successful  and  prosperous  businesses,"  so  that  ques- 
tion is  eliminated. 

There  is  no  limit  under  the  American  law  to  which  a  business 
may  not  independently  grow,  and  even  a  combination  of  two  or 
more  businesses,  if  it  does  not  unreasonably  restrain  trade,  is  not 
illegal;  but  it  is  the  combination  which  unreasonably  restrains 
trade  that  is  illegal,  and  if  the  parties  in  controversy  have  80  or 
85  per  cent  of  the  American  business,  and  by  the  combination 
of  the  companies  all  competition  is  eliminated  between  the  con- 
stituent parts  of  the  combination,  then  it  is  in  restraint  of  trade 
within  the  meaning  of  the  statute,  under  all  of  the  decisions. 


THE    INTERNATIONAL   HARVESTER   CASE  643 

We  conclude  that  the  International  Harvester  CortTpany  was 
from  the  beginning  in  violation  of  the  first  and  second  sections  of 
the  Sherman  Law,  and  that  this  condition  was  accentuated  by 
the  reorganization  of  the  American  company  and  by  the  subse- 
quent acquisitions  of  competing  plants,  and  that  all  the  defendant 
subsidiary  companies  became  from  time  to  time  parties  to  the 
illegal  combination,  and  the  defendant  companies  are  combined 
to  monopolize  a  part  of  the  interstate  and  foreign  trade.  It  will 
therefore  be  ordered  that  the  entire  combination  and  monopoly 
be  dissolved,  that  the  defendants  have  go  days  in  which  to  re- 
port to  the  court  a  plan  for  the  dissolution  of  the  entire  unlawful 
business  into  at  least  three  substantially  equal,  separate,  distinct, 
and  independent  corporations,  with  wholly  separate  owners  and 
stockholders,  or  in  the  event  this  case  is  appealed,  and  this 
decree  superseded,  then  within  90  days  from  the  filing  of  the 
procedendo  or  mandate  from  the  Supreme  Court  the  defendants 
shall  file  such  plan,  and  in  case  the  defendants  fail  to  file  such 
plan  within  the  time  limit  the  court  will  entertain  an  application 
for  the  appointment  of  a  receiver  for  all  the  properties  of  the 
corporate  defendants,  and  jurisdiction  is  retained  to  make  such 
additional  decrees  as  may  become  necessary  to  secure  the  final 
winding  up  and  dissolution  of  the  combination  and  monopoly 
complained  of,  and  as  to  costs. 

Sanborn,  Circuit  Judge  {dissenting). 

It  is  the  opinion  of  the  majority  of  the  court  that  the 
property  and  the  foreign  and  interstate  business  of  the  Inter- 
national company  must  be  divided  into  at  least  three  sub- 
stantially equal  and  independent  parts,  or  placed  in  the  hands 
of  a  receiver  under  a  decree  of  this  court,  because  in  1902 
five  companies  theretofore  engaged  in  the  manufacture  and 
sale  of  harvesting  machinery,  controlling  about  85  per  cent 
of  the  interstate  and  foreign  trade  therein,  combined  in  the 
International  company,  ceased  and  have  not  since  resumed  com- 
petition among  themselves.  With  profound  respect  for  their 
judgment,  I  find  myself  forced  to  dissent  from  it:  (i)  Because 
it  seems  to  me  to  give  insufficient  consideration  to  the  trade  con- 
duct of  the  defendants  at  the  time  this  suit  was  commenced  in 
April,  1912,  and  for  seven  years  before  that  date;  (2)  because 


644  TRUSTS,    POOLS   AND   CORPORATIONS 

the  crucial  issue  in  this  case  is  not  whether  or  not  in  1902  or 
1903  the  defendants  or  their  predecessors,  by  reason  of  the 
suppression  of  competition  between  five  or  more  companies, 
made  a  combination  or  an  attempted  monopoly  in  restraint  of 
trade,  but  it  is  whether  or  not  ten  years  afterwards,  in  191 2,  when 
the  complaint  in  this  suit  was  filed,  the  International  company 
and  the  other  defendants  were  then  unduly  or  unreasonably 
restraining  or  monopohzing  interstate  or  foreign  trade,  or  threat- 
ening so  to  do;  and  (3)  because  the  evidence  in  this  case  has 
forced  upon  my  mind  the  deep  and  abiding  conviction  that,  for 
at  least  seven  years  before  the  commencement  of  this  suit,  the 
defendants  had  not  been,  and  then  were  not,  either  so  doing  or 
threatening  so  to  do. 

1.  Conceding,  but  not  admitting,  that  if  the  combination  of 
1902  and  1903  had  been  challenged  in  1903  or  1904,  before  the 
actual  effect  of  the  conduct  of  its  business  by  the  defendants 
upon  interstate  and  foreign  trade  had  been  demonstrated  by  the 
actual  trial  of  it  from  1905  to  191 2,  a  court  might  have  presumed 
that  the  defendants  were  violating  the  Anti-Trust  Law,  and  have 
so  found  on  the  theory  that  those  who  have  power  to  violate  a 
law  are  presumed  to  do  so,  yet  the  demonstration  by  actual  trial, 
which  the  evidence  seems  to  me  to  present,  that  at  the  time  this 
suit  was  commenced  the  defendants  were,  and  for  at  least  seven 
years  before  that  time  had  been,  conducting  the  business  of  the 
International  company  and  their  business  without  unduly  re- 
straining or  monopolizing  interstate  or  foreign  trade  ought  to,  and 
in  my  opinion  must,  far  outweigh  that  questionable  presumption. 

2.  The  controlling  issue  in  this  case  is  not  what  combination 
or  monopoly  was  made  in  1902,  1903,  or  1904,  nor  whether  or 
not  that  combination  was  violate  of  the  Anti-Trust  Law.  It  is : 
Were  the  defendants  in  191 2  doing  or  threatening  to  do  acts 
which  so  unreasonably  restrained  or  monopolized  interstate  or 
foreign  trade  that  it  is  the  duty  of  this  court  of  equity  to  enjoin 
and  prevent  their  future  performance  ?  If,  therefore,  a  combina- 
tion or  monopoly,  in  unreasonable  restraint  of  trade,  was  made 
in  1902,  1903,  or  1904,  the  proceedings  to  punish  for  the  making 
thereof  were  barred  many  years  before  this  suit  was  commenced. 

Section  4  of  the  act  gives  jurisdiction  to  this  court  "  to  prevent 


THK    INTERNATIONAL    HARVESTER   CASE  645 

and  restrain  violations  of  this  act,"  but  it  grants  this  courtno  power 
to  punish  past  violations  thereof.  This  suit  is  not  a  proceeding 
to  punish  the  defendants  for  deeds  done  in  the  past.  It  is  a  suit 
in  equity  under  section  4  to  prevent  and  restrain  future  violations 
of  the  Anti-Trust  Law.  It  looks  to  the  future,  not  to  the  past, 
and  this  court  is  not  only  without  jurisdiction  to  punish  defendants 
for  past  violations  of  this  law,  but  persons  who  at  some  past 
time  combined  to  unreasonably  restrain  or  monopolize  interstate 
or  international  trade  were  not  thereby  deprived  of  their  right 
thereafter  and  now  to  conduct  such  trade  in  obedience  to  the  law. 

3.  The  particular  facts  proved  in  this  individual  case  not  only 
fail  to  show  that  the  defendants  were  unduly  or  unreasonably 
restraining  or  attempting  to  monopolize  interstate  or  foreign  trade, 
or  threatening  so  to  do  at  the  time  this  suit  was  commenced  and 
for  seven  years  before  that  time,  but  they  establish  the  converse. 

That  the  Anti-Trust  Law  is  but  the  embodimeat  and  applica- 
tion to  interstate  and  foreign  trade  of  the  ancient  English  rule 
of  public  policy  against  undue  and  unreasonable  restraints  of 
trade  and  unreasonable  monopolies,  that  it  does  not  forbid  all 
restraints  upon  such  trade  or  all  attempts  to  monopolize  it,  nor 
all  restrictions  of  competition  therein,  but  those  only  which  are 
unreasonably  injurious  to  the  public,  that  the  reason  for  and  the 
purpose  of  the  Anti-Trust  Act  are  the  same  as  the  reason  for 
and  the  purpose  of  that  English  rule  of  public  policy,  that  the 
test  and  standard  by  which  to  determine  whether  or  not  the 
defendants  in  any  case  are  unreasonably  restraining  or  monopo- 
lizing interstate  or  foreign  trade  is  the  same  which  had  been 
applied  under  the  English  rule  of  public  policy  for  years  before 
this  Anti-Trust  Act  was  enacted,  and  that,  as  Chief  Justice  White 
said,  "  the  statute  under  this  view  evidenced  the  intent  not  to 
restrain  the  right  to  make  and  enforce  contracts,  whether  result- 
ing from  combination  or  otherwise,  which  did  not  unduly  restrain 
interstate  or  foreign  commerce,  but  to  protect  that  commerce 
from  being  restrained  by  methods,  whether  old  or  new,  which 
would  constitute  an  interference  that  is  an  undue  restraint,"  are 
now  rules  of  interpretation  and  application  of  this  law  conclusively 
established  by  the  repeated  decisions  of  the  highest  judicial 
tribunal  in  the  land. 


646  TRUSTS,    POOLS   AND    CORPORATIONS 

It  is  equally  well  established  that  the  reason  for  the  prohibi- 
tion by  the  English  rule  of  public  policy  and  by  the  statute 
under  consideration  of  unreasonable  restraints  of  and  attempts 
to  monopolize  trade  was  and  is  that,  by  unduly  restricting  com- 
petition, they  are  injurious  to  the  public  in  that  (i)  they  raise 
the  prices  to  the  consumers  of  the  articles  they  affect,  (2)  limit 
their  production,  (3)  deteriorate  their  quaUty,  and  (4)  decrease 
the  wages  of  the  labor  and  the  prices  of  the  materials  required 
to  produce  them.  Undue  injury  in  the  ways  just  stated  to  the 
public  (that  is  to  say,  to  the  consumers  and  makers  of  the  arti- 
cles produced  or  sold)  is  the  basis  and  reason  for  the  prohibition 
and  the  test  of  undue  or  unreasonable  restraint  or  attempt  to 
monopolize.  And  if  in  any  individual  case  the  weight  of  the 
evidence  fails  to  prove  that  the  defendants'  conduct  of  their 
business  is  so  restricting  or  threatening  to  restrict  competition 
in  the  articles  they  make  or  sell  as  to  unduly  injure  the  public 
by  (i)  raising  the  prices  of  the  articles  to  the  consumers,  or 
(2)  limiting  their  production,  or  (3)  deteriorating  their  quality, 
or  (4)  decreasing  the  prices  paid  for  the  labor  or  materials 
required  to  produce  them,  or  (5)  by  unfair  and  oppressive  treat- 
ment of  competitors,  neither  undue  nor  unreasonable  restraint 
of  competition,  nor  of  trade,  nor  undue  attempt  to  monopolize 
is  established.  The  reason  for  the  rule  and  for  the  prohibition 
in  the  law  does  not  exist,  and  the  law  is  inapplicable.  Such 
a  case  the  evidence  in  this  case  seems  to  me  to  present. 

Counsel  for  the  government  recognize  the  fact  that  it  was 
essential  to  the  grant  of  the  relief  they  sought  that  they  should 
plead  and  prove  that,  at  the  commencement  of  this  suit,  the 
defendants  were  committing,  and  threatening  to  commit,  the 
acts  constituting  undue  restriction  of  competition,  undue  re- 
straint of  trade,  and  undue  attempt  to  monopolize  trade  which 
have  been  recited,  and  they  alleged  that  they  were  committing 
them  in  their  complaint.  The  main  charge  in  their  pleading 
was  that  the  defendants  between  1903  and  April  30,  1912,  had, 
by  means  of  the  International  company,  unduly  restricted  com- 
petition in  the  manufacture  and  sale  of  harvesting  machinery, 
drawn  to  itself  the  business  therein,  excluded  other  manu- 
facturers and  dealers  therefrom,  and    that  they  threatened  to 


THE    INTERNATIONAL   HARVESTER   CASE  647 

continue  so  to  do.  The  evidence,  however,  scems*4:o  me  to 
have  established  the  following  facts,  which  in  my  judgment 
proved  the  contrary : 

The  amount  of  domestic  sales  of  the  old  lines  claimed  to  have 
been  monopolized  (that  is  to  say,  of  the  harvesting  machinery) 
by  the  five  companies  whose  business  was  acquired  by  the 
International  company  in  1902  was  $46,142,158.64  in  that  year. 
The  amount  of  the  domestic  sales  of  like  machinery  by  the 
International  company  in  1903  was  $37»763. 858.55.  a  decrease 
of  18.16  per  cent;  in  1904  it  was  $32,337,917-32,  a  decrease  in 
the  two  years  of  29.92  per  cent;  in  1905  it  was  $30,999,632.59. 
a  decrease  in  the  three  years  of  32.82  per  cent ;  and  in  1912  it 
was  only  $39,062,455.36,  which  was  15.34  per  cent  less  than  the 
amount  of  the  domestic  sales  of  the  combining  companies  in 
1902. 

The  average  yearly  acreage  and  production  of  small  grain  in 
the  United  States  during  the  ten  years  prior  to  191 3  was  greater 
than  during  the  nine  years  prior  to  1903.  But  the  yearly 
average  domestic  sales  of  the  International  company  of  all 
agricultural  machinery,  including  both  the  old  lines  charged  to 
have  been  monopoHzed  and  the  new  hues,  such  as  harrows  and 
cultivators,  during  the  ten  years  prior  to  191 3,  was  $46,810,067, 
which  was  more  than  a  million  dollars  less  than  the  domestic 
sales  of  the  vendor  companies  in  1902. 

In  1903  the  International  company  sold  98.15  per  cent  of  the 
binders  sold  in  the  United  States;  in  1912  only  85.04  per  cent 
thereof.  In  1903  the  International  company  sold  92.05  per 
cent  of  all  the  mowers  sold  in  the  United  States  ;  in  1912  only 
72.98  per  cent  thereof.  In  1903  the  International  company  sold 
84.91  per  cent  of  the  rakes  sold  in  the  United  States;  in  191 1 
it  sold  67.79  per  cent  thereof. 

The   average  number  of   binders  sold  in  the  United    States 

yearly  by  the  five  combining  companies  during  the  five  years 

prior  to  1902  was  152,364;  the  average  number  sold  yearly  by 

the  International  company  during  the  first  ten  years  of  its  exist- 

■  ence  was  91,465. 

In  1903  the  International  company  had  five  competitors,  who 
in  that  year  sold  in  the  United  States  i960  binders,  while  in 


648  TRUSTS,    POOLS   AND   CORPORATIONS 

191 2  these  competitors  sold  15,631  binders  and  three  new  com- 
petitors sold  3979.  In  1903  eight  competitors  of  the  Interna- 
tional company  sold  in  the  United  States  17,985  mowers,  and 
in  19 1 2  these  and  six  other  competitors  sold  60,816.  In  1903 
ten  competitors  of  the  International  company  sold  in  the 
United  States  27,753  rakes,  and  in  191 1  these  and  five  other 
competitors  sold  42,723,  while  the  International  company  sold 
157,160  in  1903  and  only  89,912  in  1912.  In  1901  and  1902  in 
the  section  of  Nebraska  south  of  the  Platte  river,  the  combining 
companies  sold  substantially  all  the  binders,  but  in  191 2  the 
evidence  tends  to  show  that  their  competitors  sold  about  one 
half  the  binders  sold  in  that  country. 

During  all  of  the  ten  years  prior  to  191 3,  the  International 
company  has  had  active  and  successful  competitors  in  the  man- 
ufacture and  sale  of  harvesting  machines,  and  during  those 
years  new  competitors  have  established  themselves  in  the  busi- 
ness and  become  successful.  Among  its  competitors  in  the 
manufacture  and  sale  of  harvesting  machinery  are  the  Acme 
company,  which  entered  the  field  in  1907  or  1908,  which  makes 
harvesting  machinery  only,  which  conducts  a  growing  and 
successful  business,  and  which  sold  in  the  United  States  11,000 
harvesting  machines  in  1908  for  ^779,672  and  31,000  harvesting 
machines  in  191 2  for  ^2,100,000;  Deering  &  Co.  with  an  issued 
capital  stock  of  over  ;$ 50,000,000,  which  sold  490  mowers  in  1906 
and  7314  in  191 1  ;  the  Johnston  Harvester  Company  with  an 
issued  capital  stock  of  $1,800,000  whose  sales  of  binders  increased 
from  1002  in  1903  to  3027  in  191 1,  whose  sales  of  mowers  in- 
creased from  2527  in  1903  to  7026  in  191 1,  whose  sales  of  corn 
binders  increased  from  528  in  1903  to  3150  in  191 1,  and  whose 
sales  of  rakes  increased  from  1855  ^^  1903  to  5200  in  191 1; 
the  Independent  Harvester  Company  which  entered  the  field 
with  the  manufacture  of  954  mowers  and  135  binders  in  19 10 
and  increased  its  output  to  about  2700  mowers  and  about  1900 
binders  in  1912;  the  Wood  Mowing  &  Reaping  Company  and 
several  others,  while  the  J.  I.  Case  Threshing  Machine  Company, 
with  an  issued  capital  stock  of  $20,000,000,  was  constructing, 
when  this  suit  was  commenced,  a  large  plant  to  manufacture  a 
binder  to  be  sold  in  competition  with  those  of  the  International 


THE    INTERNATIONAL   HARVESTER   CASE  649 

company.  The  foregoing  facts  portray  the  course  of-the  busi- 
ness in  the  old  lines.  In  the  new  lines  scores  of  companies  and 
tens  of  millions  of  dollars  and  capital  were  and  are  engaged  in 
active  and  successful  competition  with  the  International  Har- 
vester Company.  The  facts  which  have  been  recited,  and  other 
facts  and  circumstances  to  the  same  effect,  seem  to  me  to  estab- 
lish the  conclusion  that,  during  the  ten  years  of  the  operation  of 
the  International  Harvester  Company,  neither  it  nor  the  defend- 
ants were,  nor  are  they,  drawing  to  it  its  competitors'  share  of 
the  interstate  trade  in  harvesting  machinery,  or  excluding  them 
therefrom,  and  that,  on  the  other  hand,  the  International  com- 
pany's proportion  of  this  trade  has  been  decreasing  and  that  of 
its  competitors  increasing. 

Counsel  for  the  government  charged  that  the  defendants 
bought  factories  and  failed  to  operate  them  in  order  to  restrain 
and  monopolize  the  trade,  but  the  proof  was  that  they  operated 
every  factory  they  purchased.  And  the  purchase  of  factories 
and  the  organization  and  operation  of  subsidiary  companies  to 
produce  or  prepare  the  raw  materials  needed  for  the  manufac- 
ture of  their  machines,  or  to  manufacture  new  lines  of  imple- 
ments, was  a  just  and  lawful  method  of  conducting  their 
business  and  tended  not  to  restrain  but  to  promote  trade  and 
competition. 

If  competition  is  desirable,  the  entry  of  a  new  competitor  into 
any  line  of  manufacture  or  trade  is  ordinarily  lawful  and  must  be 
generally  beneficial. 

The  government  charged  that  the  defendants  systematically 
bought  up  patents  on  and  inventions  of  harvesting  machinery  in 
order  to  make  or  perpetuate  a  monopoly  in  the  trade  in  it.  But 
the  proof  was  that  the  defendants  have  no  patents  upon  any 
parts  of  any  of  their  harvesting  machines,  and  that  any  manu- 
facturer is  free  to  make  and  sell  any  or  all  parts  of  them  in 
competition  with  them. 

Counsel  for  the  government  alleged  that  the  defendants  re- 
duced the  prices  of  its  machines  in  certain  localities  in  order  to 
drive  competitors  out  of  the  trade,  and  increased  their  prices  in 
other  localities  to  make  up  the  loss,  and  that  it  committed  many 
oppressive  and  unjust  acts  to  restrict  competition  and  monopolize 


650  TRUSTS,    POOLS   AND   CORPORATIONS 

trade.  Volumes  of  evidence  were  taken  regarding  these  aver- 
ments. The  conduct  of  the  business  of  the  defendants  for  years 
in  all  parts  of  the  land  were  searched  and  proved.  Among  the 
innumerable  acts  of  the  defendants  and  their  agents  in  conduct- 
ing their  vast  business  for  a  decade,  the  government  found  some 
that  were  unfair  to  competitors,  but  they  were  either  unauthor- 
ized acts  of  subordinate  agents  or  sporadic  and  exceptional  in- 
stances. The  weight  of  the  evidence  of  the  officers  and  agents 
of  their  competitors  who  came  in  large  numbers  to  'testify,  and 
of  all  the  witnesses  upon  the  subject,  is  so  overwhelming  that 
the  general  conduct  and  the  almost  universal  practice  of  the 
defendants  and  their  agents  was  and  is  free  from  all  methods 
and  acts  either  unlawful,  unfair,  or  oppressive  towards  their 
competitors,  that  it  has  left  no  doubt  that  the  consistent  and 
persistent  purpose,  policy,  rule  of  action,  and  practice  of  the 
defendants  has  been  and  is  to  avoid  and  prevent  all  acts  and 
methods  unfair,  unjust,  or  oppressive  towards  their  competitors, 
to  leave  competition  with  them  free,  to  give  to  them  full  and  fair 
opportunities  to  secure  shares  of  the  trade  and  business  in  which 
they  are  all  engaged,  and  to  carry  on  their  own  trade  honestly, 
justly,  and  fairly. 

During  the  ten  years  from  1902  to  191 2  there  was  a  general 
and  substantial  rise  in  the  prices  of  machinery  and  commodities 
of  nearly  all  kinds  in  the  United  States.  Harvesting  machines 
were  improved  and  made  more  durable  and  efficient.  But  their 
prices  to  the  consumers  remained  nearly  stationary,  and  increased 
far  less  than  the  prices  of  other  agricultural  machinery  the  trade 
in  which  was  not  claimed  to  have  been  restrained  or  monopo- 
lized. The  chief  harvesting  machine  was  the  binder.  Its  price 
advanced  about  5  per  cent  during  some  of  the  intermediate  years, 
but  was  substantially  the  same  in  1912  for  a  better  machine  than 
it  was  for  a  poorer  machine  in  1902,  while  the  prices  of  cultiva- 
tors, wagons,  and  plow  goods,  which  were  certainly  not  monopo- 
lized, advanced  from  10  to  30  per  cent. 

The  government  charged  that  the  defendants  monopolized 
the  trade  in  binder  twine  and  increased  its  price  to  the  consum- 
ers, but  the  proof  was  that  in  191 2  the  inmates  of  two  state's 
prisons    and   fourteen    other   competitors    were    selling    binder 


THE    INTERNATIONAL   HARVESTER   CASE  651 

twine ;  that  one  of  them,  the  Plymouth  Cordage  Con^gany,  sold 
100,000,000  pounds  of  it  in  that  year,  while  the  International 
company  sold  only  1 12,000,000  pounds  in  the  United  States  and 
22,000,000  pounds  in  Canada  ;  and  that  the  price  of  binder  twine 
decreased  from  11  cents  a  pound  in  1902  to  y\  cents  a  pound  in 
191 2.  Meanwhile  the  cost  of  the  raw  material  required  to  make 
harvesting  machines  advanced,  and  the  wages  of  the  labor  re- 
quired to  construct  them  increased  from  20  to  30  per  cent. 

So  it  is  that  the  evidence  has  convinced  me  that  at  least  for 
seven  years  before  this  suit  was  commenced,  and  at  that  time, 
the  defendants  were  neither  unduly  restricting  competition  in 
the  manufacture  or  sale  of  the  machinery  and  articles  in  which 
they  were  deaHng  or  drawing  to  themselves  an  undue  share  of 
the  business  therein,  or  excluding  other  manufacturers  and  deal- 
ers therefrom,  or  practicing  acts  unjust  and  unfair  to,  or  oppres- 
sive of,  their  competitors,  or  threatening  so  to  do ;  that  they 
were  not  injuring  the  public  by  raising  the  prices  to  the  consum- 
ers of  the  articles  in  which  they  dealt,  or  limiting  the  production 
thereof,  or  deteriorating  their  quality,  or  decreasing  the  wages  of 
the  laborers  employed  to  make  them,  or  the  prices  paid  for  the 
materials  required  to  construct  them,  or  threatening  so  to  do; 
but  that  they  were  doing  the  opposite  of  these  things.  And  the 
acts  of  the  defendants  and  the  proved  effect  of  their  acts  during 
at  least  seven  years  before  this  suit  was  commenced,  to  my  mind, 
demonstrate  the  fact  that  they  were  neither  unduly  nor  unrea- 
sonably restraining  or  attempting  to  monopolize  interstate  or 
foreign  trade  in  the  articles  they  made  and  sold,  and  that  they 
and  their  case  fall  far  without  the  prohibition  of  the  Anti-Trust 
Law  and  the  reason  for  it. 

4.  The  only  reason  for  the  prevention  or  restraint  of  acts  of 
defendants  in  a  suit  under  the  fourth  section  of  the  statute  is,  as 
we  have  seen,  that  they  are  or  threaten  to  be  unduly  injurious  to 
the  public.  If  they  are  not  thus  injurious,  or  if  they  are  bene- 
ficial, and  such  restraint  or  prevention  of  their  acts  would  be 
injurious  to  the  public,  they  should  not  be  restrained  or  pre- 
vented. The  defendants  claim  that  the  main  purpose  of  the 
combination  of  1902  and  1903  was  to  develop  the  foreign  trade 
in  American  harvesting  machines ;  that  that  development  could 


652  TRUSTS,    POOLS   AND    CORPORATIONS 

not  be  successfully  made  without  a  much  larger  capital  than  any 
of  the  combining  companies  possessed ;  and  that  the  cessation 
of  competition  among  the  combining  companies  was  merely  inci- 
dental to  the  acquisition  of  the  capital  requisite  to  accomplish 
that  purpose.  The  facts  in  this  case  are  so  clear  that  the  pur- 
pose and  intent  of  the  defendants  are  not  material.  The  pre- 
vention or  restriction  of  their  acts  by  the  decree  of  a  court  of 
equity  is  always  a  matter  within  the  sound  judicial  discretion  of 
the  chancellor  or  chancellors  composing  the  court,  and,  while  in 
exercising  this  discretion  the  rules  of  law  and  the  facts  already 
stated  seem  to  me  to  be  decisive,  the  following  are  not  altogether 
unworthy  of  consideration.  The  proof  is  that  during  the  ten 
years  preceding  191 3  the  International  company  at  great  ex- 
pense taught  the  people  of  foreign  countries  the  use  of  American 
harvesting  machinery,  and  developed  the  foreign  trade  therein 
in  such  a  way  that,  while  in  1902  the  sales  in  foreign  trade  of 
machines,  repairs,  and  twine  by  the  companies  whose  business 
was  acquired  by  the  International  company  amounted  to  about 
1^10,400,000,  the  sales  of  the  International  company  in  the  for- 
eign trade  gradually  increased  until  in  191 2  they  amounted  to 
^50,896,000,  and  so  that,  w^hile  in  1903  the  domestic  sales  of 
that  company  were  76.5  per  cent,  and  its  sales  in  the  foreign 
trade  were  23.5  per  cent,  of  its  total  sales,  in  1912  its  domestic 
sales  were  55.7  per  cent,  and  its  sales  in  the  foreign  trade  44.3 
per  cent,  of  its  total  sales.  The  employment  of  the  necessary 
American  laborers  and  salesmen  at  the  increasing  wages  the 
defendants  have  paid  and  are  paying  to  make  and  to  sell  in  other 
lands  these  machines  and  the  purchase  at  the  increasing  prices 
paid  of  the  materials  to  construct  this  vast  volume  of  machinery 
unavoidably  tends  to  increase  the  wages  of  the  laborers  and  the 
prices  of  the  materials,  and  hence  to  benefit  the  public,  and  any 
receivership  or  subdivision  of  the  property  and  the  business  of 
these  defendants  cannot  fail  to  tend  to  cripple  and  diminish  this 
business,  to  restrain  the  advance,  or  to  decrease  the  wages  of  the 
laborers  and  the  prices  of  the  materials  required  to  carry  it  on, 
and  thereby  to  inflict  injury  upon  the  public. 

Again,    the    combination    denounced    and    the    International 
company,  in   which  it  was    embodied,  have  been  in  existence, 


THE   INTERNATIONAL   HARVESTER   CASE  653 

and  that  company  and  the  other  defendants  had  been  conduct- 
ing their  business,  for  almost  ten  years  before  this  stl!f  was  com- 
menced. If  the  making  of  that  combination  was  originally  a 
violation  of  the  Anti-Trust  Act,  the  prosecution  of  the  defend- 
ants at  law  under  sections  i  and  2  of  the  Anti-Trust  Act  for  that 
violation  was  barred  many  years  before  this  suit  was  commenced. 

5.  The  evidence  in  this  suit  seems  to  me  to  present  a  new 
case  under  the  Anti-Trust  Law.  No  case  has  been  found  in  the 
books,  and  none  has  come  under  my  observation,  in  which  the 
absence  of  all  the  evils  against  which  that  law  was  directed  at 
the  time  the  suit  was  brought,  and  for  seven  years  before,  was  so 
conclusively  proved  as  in  this  suit,  the  absence  of  unfair  or  oppres- 
sive treatment  of  competitors,  of  unjust  or  oppressive  methods  of 
competition,  the  absence  of  the  drawing  of  an  undue  share  of  the 
business  away  from  competitors  and  to  the  defendants,  the 
absence  of  tha  raising  of  prices  of  the  articles  affected  to  their 
consumers,  the  absence  of  the  Umiting  of  the  product,  the  absence 
of  the  deterioration  of  the  quality,  the  absence  of  the  decrease  of 
the  wages  of  the  laborers  and  of  the  prices  of  the  materials,  the 
absence,  in  short,  of  all  the  elements  of  undue  injury  to  the  pub- 
lic and  undue  restraint  of  trade,  together  with  the  presence  of 
free  competition  which  increased  the  share  of  the  competitors  in 
the  interstate  trade  and  decreased  the  share  of  the  defendants. 
Neither  the  Standard  Oil  company  case,  nor  the  American 
Tobacco  company  case,  nor  any  other  authority  cited,  seems 
to  me  to  rule  this  case,  because  in  none  of  them  was  there 
such  afTfirmative  and,  to  my  mind,  conclusive  evidence  that  for 
years  before  the  suits  were  commenced  the  defendants  had  prac- 
ticed no  acts  and  pursued  no  methods  which  constituted  an  undue 
restraint  of  trade  or  an  unreasonable  attempt  to  monopolize  it. 

And  because  in  this  suit  this  court  is  without  power  to  punish 
past  violations  of  the  Anti-Trust  Law,  and  the  limit  of  its  juris- 
diction is  to  prevent  and  enjoin  future  acts  violative  thereof, 
because  the  making  of  the  combination  of  1902  and  1903, 
whether  violative  of  the  Anti-Trust  Law  or  not,  did  not  deprive 
the  defendants  of  their  right  thereafter  and  now  to  conduct  their 
business  in  obedience  to  that  law,  because  the  question  in  this 
case  is  not  whether  or  not  the  combination  of   1902  and   1903 


654  TRUSTS,    POOLS   AND   CORPORATIONS 

was  violative  of  that  law,  but  it  is  whether  or  not  in  April,  191 2, 
when  this  suit  was  commenced,  the  defendants  were  unduly  or 
unreasonably  restraining  or  attempting  to  monopolize  interstate 
or  foreign  trade,  because  it  was  not  the  effect  of  the  Anti-Trust 
Law,  nor  was  it  the  intent  of  the  Congress  which  passed  it,  to 
prohibit  all  restriction  of  competition  or  all  restraints  of  inter- 
state or  foreign  trade,  or  all  attempts  to  monopolize  parts  of  it, 
but  only  those  restraints  and  attempts  to  monopolize  which  are 
unduly  injurious  to  the  public  by  (i)  raising  the  prices  to  the 
consumers  of  the  articles  they  affect,  (2)  limiting  their  produc- 
tion, (3)  deteriorating  their  quality,  (4)  decreasing  the  wages 
of  the  laborers  and  the  prices  of  the  materials  required  to  pro- 
duce them,  or  (5)  practicing  unfair  and  oppressive  treatment  of 
competitors,  because  the  evidence  has  convinced  me  that  for  at 
least  seven  years  before  this  suit  was  commenced,  and  at  that 
time,  the  defendants  were  not  injuring  the  public  by  unduly  or 
unreasonably  restricting  competition  in  the  manufacture  or  sale 
of  the  machinery  or  articles  which  they  were  making  and  selling, 
or  by  drawing  to  themselves  an  undue  share  of  the  business 
therein,  or  by  excluding  other  manufacturers  or  dealers  there- 
from, or  by  practicing  acts  unjust  or  unfair  to,  or  oppressive  of, 
their  competitors,  that  they  were  not  injuring  the  public  by 
raising  the  prices  to  the  consumers  of  the  articles  they  made  or 
sold,  or  limiting  their  production,  or  deteriorating  their  quality, 
or  decreasing  the  wages  of  the  laborers  employed  to  make  them, 
or  the  prices  paid  for  the  materials  required  to  construct  them, 
that  they  were  not  threatening  to  do  these  things,  but  they  were 
doing  the  opposite  of  these  things  to  the  substantial  benefit  of 
their  competitors,  of  the  consumers  of  their  products,  of  the 
laborers  who  make  them,  the  men  who  furnish  the  material  for 
them,  and  the  public  in  general,  because  the  acts  of  the  defend- 
ants during  these  seven  years  do  not  constitute  that  undue  or 
unreasonable  restraint  of  or  attempt  to  monopolize  interstate  or 
foreign  trade  forbidden  by  the  Anti-Trust  Act,  and  because,  in 
my  opinion,  the  prevention  or  restraint  of  these  acts  or  this 
business  of  the  defendants,  or  the  splitting  of  their  business  and 
property  into  three  or  more  independent  parts,  or  the  seizure  of 
it  by  a  receiver,  by  virtue  of  a  decree  of  a  court  of  equity,  would 


THE    KEYSTONE   WATCH    CASE  655 

not  tend  to  prevent  undue  restraint  of,  or  undue  attempts  to 
monopolize,  interstate  or  foreign  trade,  but,  on  the  other  hand, 
would  tend  to  produce  or  foster  the  very  evils  at  which  the 
Anti-Trust  Act  was  leveled,  to  wit,  the  restriction  or  lessening 
of  competition,  the  increase  of  the  prices  of  the  machinery  and 
articles  affected,  the  deterioration  of  their  quality,  the  limitation 
or  reduction  of  the  product  and  the  diminution  of  the  wages  of 
the  laborers  making  them  and  of  the  prices  of  the  materials 
required  to  produce  them  to  the  substantial  injury  of  the  public, 
I  am  unable  to  concur  in  the  opinion  or  the  decree  against  the 
defendants  in  this  case.  In  my  opinion,  a  decree  should  be 
rendered  that  the  complaint  in  this  suit  be  dismissed  without 
prejudice  to  the  right  of  the  United  States  to  bring  another  suit 
of  like  character  against  any  of  the  defendants  whenever  any 
of  them  is  found  to  be  engaged  in  the  commission  of  any  acts 
in  violation  of  the  anti-trust  statute. 


THE    KEYSTONE    WATCH    CASE  1 
Unfair  Practice 

As  might  be  expected  in  a  record  so  voluminous,  the  evidence, 
whether  oral  or  in  writing,  is  not  always  either  relevant  or  com- 
petent ;  but  we  shall  not  discuss  it  in  detail,  contenting  ourselves 
with  finding  such  of  the  ultimate  facts  as  seem  to  be  necessary. 

The  present  Keystone  company  is  the  second  of  that  name, 
both  of  them  being  Pennsylvania  corporations.  The  first  was 
organized  in  1886,  and  was  the  successor  of  several  Philadelphia 
manufacturers,  beginning  with  James  Boss,  the  inventor  of  the 
filled  or  rolled-plate  case,  and  comprising  also  John  Stukert, 
Hagstoz  &  Thorpe,  and  C.  N.  Thorpe  &  Co.  These  firms  and 
their  corporate  successor  manufactured  superior  cases  and  ac- 
quired an  excellent  reputation  in  the  trade.  Owing  to  the  death 
of  certain  persons  that  had  been  interested  in  the  business,  and 
to  the  consequent  need  of  providing  for  the  demands  of  their 
estates,  some  new  financial  arrangements  seemed  to  be  desir- 

1  U.  S.  V.  Keystone  Watch  Case  Co.,  Circuit  Court,  218  Fed.  Rep.  502;  decided 
Jan.  2,  1915. 


656  TRUSTS,    POOLS    AND    CORPORATIONS 

able.  At  the  same  time  an  association  known  as  the  T.  Zur- 
brugg  Co.  was  manufacturing  an  inferior  grade  of  watch  cases 
at  Riverside,  N.J.,  and  some  of  the  persons  interested  in  that  asso- 
ciation had  certain  financial  connections  with  the  two  estates  just 
referred  to.  (A  year  or  two  before,  the  Zurbrugg  company  had 
bought  a  small  business,  owned  by  J.  Muhr  &  Brother,  of  Phila- 
delphia, and  had  combined  it  with  their  own.)  It  was  beUeved  by 
the  old  Keystone  company  and  by  the  Zurbrugg  company  that 
a  union  of  the  two  enterprises  would  be  mutually  advantageous, 
so  that  both  grades  of  cases  might  be  made  under  one  manage- 
ment. Accordingly,  a  new  company  —  the  present  defendant 
—  was  incorporated,  and  this  company  bought  outright  the 
title  to  the  plant,  business,  and  good  will,  of  the  old  corporation 
and  of  the  Zurbrugg  company.  The  persons  interested  in  these 
two  enterprises  received  either  cash  or  stock  in  the  n^w  com- 
pany at  their  option.     This  transaction  took  place  in  July,  1899. 

In  the  following  August  the  Philadelphia  Watch  Case  Com- 
pany was  organized  for  the  purpose  of  selling  the  product  of 
the  Riverside  plant.  All  of  its  capital  stock  was  owned  by  the 
Keystone  company.  As  already  stated,  this  product  was  inferior 
in  grade,  and  a  separate  sale  thereof  seemed  advisable  in  order 
to  avoid  confusing  the  cases  made  in  the  two  plants  respec- 
tively. 

Early  in  1900  the  capital  stock  of  the  New  York  Standard 
Watch  Company,  a  New  Jersey  corporation  with  a  plant  at 
Jersey  City,  was  in  the  market.  This  company  did  not  manu- 
facture cases,  its  only  product  being  inexpensive  movements. 
The  Keystone  company  purchased  for  cash  the  capital  stock  of 
the  Standard  company,  the  object  being  to  supply  the  demand 
for  cheap  completed  watches.  The  Keystone  company  had 
found  some  difficulty  in  selling  its  cheaper  watch  cases  because 
of  the  lack  of  cheap  movements  to  go  with  them,  the  movements 
manufactured  by  the  principal  movement  companies  being  rela- 
tively too  expensive.  The  separate  corporate  organization  of 
the  Standard  company  was  continued,  and  the  size  and  the 
product  of  the  plant  were  increased. 

Early  in  January,  1901,  the  Philadelphia  firm  of  Bates  & 
Bacon,  a  small  manufacturer  of  cases,  sold  all  its  property  to 


THE   KEYSTONE   WATCH   CASE  657 

the  Keystone  company,  the  machinery  at  cost,  and  ttTg"  finished 
product  at  selling  prices. 

In  the  same  month,  a  small  movement  business  at  Waltham, 
Mass.,  owned  by  the  United  States  Watch  Company,  offered  to 
sell  out  to  the  Keystone  company,  and  in  June,  or  thereabouts, 
the  sale  was  made.  The  object  of  the  purchaser  was  to  manu- 
facture medium-priced  movements  at  Waltham,  and  for  this 
purpose  additional  capital  was  furnished,  and  the  plant  and 
facilities  were  enlarged.  A  New  Jersey  corporation  by  the 
same  name  —  United  States  Watch  Company  —  with  an  author- 
ized capital  of  one  milHon  ($1,000,000)  dollars  was  organized, 
and  operated  the  Waltham  plant  for  about  two  years,  manufac- 
turing medium-priced  movements  only.  The  business,  however, 
was  not  successful. 

In  January,  1903,  the  watch-movement  business  of  the 
E.  Howard  Clock  Company  was  offered  for  sale  by  a  receiver. 
This  company  had  formerly  manufactured  an  excellent  and 
favorably  known  movement,  but  for  several  years  the  business 
had  been  discontinued.  Seeing  an  opportunity  to  use  the  repu- 
tation of  the  Howard  movement  to  aid  the  United  States  Watch 
Company's  business  at  Waltham,  the  Keystone  company  bought 
the  good  will,  machinery,  and  trade-marks,  of  the  Clock  com- 
pany, so  far  as  they  related  to  watches  and  watch  movements, 
and  moved  everything  to  Waltham.  The  United  States  Watch 
Company  was  thereupon  abandoned,  and  a  new  company  was 
organized  under  the  laws  of  New  Jersey,  called  the  E.  Howard 
Watch  Company  —  all  of  its  stock  being  owned  by  the  Key- 
stone company  —  and  the  Howard  company  took  over  the 
United  States  company's  plant,  and  has  since  been  manufac- 
turing fine  and  expensive  movements  at  Waltham.  The  watch 
movements  formerly  manufactured  by  the  E.  Howard  Clock 
Company  had  in  no  way  competed  with  the  product  of  the  Key- 
stone company,  whose  movements  were  neither  high  grade  nor 
expensive. 

In  December,  1902,  the  common  stock  (4000  shares)  of  the 
Crescent  Watch  Case  Company,  of  Newark,  N.J.,  was  offered 
to  the  Keystone  company,  and  was  purchased  in  the  follow- 
ing   February,  being    paid  for  partly  in    cash    and    equivalent 


658  TRUSTS,    POOLS   AND    CORPORATIONS 

obligations,  and  partly  (|)  in  the  common  stock  of  the  Keystone 
company.  (Later,  in  1906,  the  preferred  stock  of  the  Crescent 
was  also  bought  by  the  Keystone  company  for  cash.)  The 
reasons  for  the  purchase  were  these :  the  Crescent  cases  and 
the  movements  of  the  well-known  Waltham  Watch  Company 
(not  the  United  States  company  referred  to  above)  had  both 
been  handled  by  one  firm,  who  acted  as  the  exclusive  selling 
agent  for  each,  so  that  the  sale  of  Keystone  cases  to  be  used 
with  the  movements  of  the  Waltham  Watch  Company  was 
interfered  with  ;  and  the  sale  of  Crescent  cases  to  be  used  with 
other  than  Waltham  movements  was  also  interfered  with.  The 
union  of  the  two  companies  seemed  likely  to  eliminate  both 
these  hindrances.  Moreover,  their  respective  sales  were  in 
different  markets,  where  they  competed,  not  so  much  with  each 
other  as  with  other  manufacturers,  of  whom  there  were  several 
actively  engaged  in  business  and  apparently  prospering.  The 
union  was  voluntary  on  the  part  of  both  companies ;  the  Key- 
stone company  exercised  no  pressure  or  coercion  upon  the 
Crescent,  and  the  trade  of  neither  was  restricted  or  diminished. 
Moreover,  prices  to  the  public  were  not  raised  as  the  result  of 
the  union,  except  perhaps  to  a  small  extent. 

From  time  to  time  the  issued  capital  stock  of  the  Keystone 
company  had  been  increased,  reaching  $6,000,000  in  the  end  — 
all  of  it  having  been  issued  for  cash — -and  in  1910  all  the  assets 
of  the  Philadelphia,  the  Standard,  the  Howard,  and  the  Crescent 
companies  were  formally  transferred  to  the  Keystone  company, 
and  the  four  companies  first  named  abandoned  their  separate 
organizations  (which  had  theretofore  been  maintained)  and 
ceased  to  exist,  either  actually  or  in  effect. 

In  1903,  the  Keystone  company  became  interested  in  the  watch- 
case  business  in  Canada  under  the  following  circumstances  : 

For  several  years  the  American  Watch  Case  Company,  of 
Toronto,  Limited,  had  been  manufacturing  in  the  Dominion, 
but  its  plant  was  not  satisfactory,  and  for  this  or  some  other 
reason  its  business  was  for  sale.  This  fact  became  known  to 
the  Keystone  company,  and  to  the  Elgin  and  the  Waltham 
movement  companies.  No  one  of  these  three  had  been  able  to 
do  much  in  the  Canadian  market,  owing  in  part  to  the  tariff  of 


THE    KEYSTONE    WATCH    CASE  659 

that  country,  and  in  part  to  other  reasons  not  importaiU-  to  enu- 
merate. These  three  companies  determined,  therefore,  to  use 
the  Toronto  company  in  order  to  enter  the  Canadian  market 
with  Keystone  cases,  and  also  with  Elgin  and  with  Waltham 
movements,  and  to  that  end  bought  the  capital  stock  of  the 
Toronto  company  —  the  Keystone  acquiring  851  shares  out  of 
2000,  and  the  rest  being  held  largely  in  the  interest  of  the  Elgin 
and  the  Waltham  companies.  The  American  Watch  Case  Com- 
pany has  since  that  time  improved  its  methods  of  manufacture, 
and  has  increased  its  business.  Later,  a  selling  agent  for  Canada 
was  organized,  in  which  the  Keystone  company  owns  the  capital 
stock.  If  this  transaction  has  any  relevancy,  we  need  only  add 
that  it  did  not  restrain,  but  rather  benefited,  the  foreign  trade 
with  Canada  in  cases  and  in  movements. 

Up  to  this  time,  we  discover  nothing  unlawful  in  the  operations 
of  the  Keystone  company.  No  doubt  it  had  been  growing,  and 
it  had  grown  in  part  by  acquiring  or  controlling  several  other 
plants,  but  it  had  not  acquired  them  by  improper  methods,  and 
it  had  not  used  its  acquisitions  improperly.  There  was  no  con- 
cealment about  its  growth,  and  the  trade  was  well  informed  about 
its  operations.  Its  plants  were  enlarged  or  improved,  the  volume 
of  production  was  increased,  prices  were  not  inflated,  competitors 
were  not  unlawfully  attacked,  and  we  find  nothing  in  the  evi- 
dence that  would  justify  us  in  condemning  the  foregoing  steps 
in  the  company's  activity.  A  merchant  may  without  offense  add 
one  department  to  another  as  his  business  prospers,  or  his  ambi- 
tion expands ;  for  the  size  and  the  varied  character  of  his  enter- 
prise do  not  in  themselves  violate  the  Anti-Trust  Act.  Size 
does  not  of  itself  restrain  trade  or  injure  the  public ;  on  the  con- 
trary, it  may  increase  trade  and  may  benefit  the  consumer ;  but, 
if  the  power  given  by  the  volume  of  a  particular  business  is  im- 
properly used  to  injure  either  a  competitor  or  the  public,  or  if  such 
power  evidently  tends  toward  the  injury  of  either,  the  mischief 
either  done  or  threatened  is  condemned  by  the  statute. 

In  this  connection,  it  may  be  observed,  that  as  power  increases 
the  temptation  to  abuse  it  is  likely  also  to  increase,  so  that  the 
acts  of  an  influential  factor  in  a  particular  trade  may  well  be 
scrutinized  with  more  suspicion  than  the  acts  of  a  weak  and  in- 


66o  TRUSTS,   POOLS   AND   CORPORATIONS 

conspicuous  contributor.  And  we  have  now  reached  a  point  in 
these  transactions  when  we  think  the  evidence  establishes  that 
the  defendant  company  did  use  its  power  unlawfully.  Begin- 
ning in  1904  or  thereabouts,  it  made  several  attempts  —  perhaps 
not  very  numerous,  but  numerous  enough  — that  showed  a  defi- 
nite purpose  to  restrain  trade  by  attempting  to  fix  and  maintain 
prices,  and  by  using  a  species  of  boycott  or  blacklisting  in  order 
to  lessen  the  trade  of  its  rivals.  We  shall  not  stop  to  detail  the 
attempts  of  this  character  that  were  made  during  the  period 
from  1904  to  191  o,  because  the  policy  and  system  to  which  we 
refer  were  manifested  with  unmistakable  distinctness  in  the 
latter  year,  and  were  carried  on  with  vigor  and  persistence.  It 
will  be  sufficient,  therefore,  to  state  what  was  attempted,  and 
what  was  actually  done,  from  January,  19 10,  forward. 

On  the  15th  of  that  month  the  following  circular  was  formally 
adopted  by  the  Keystone  company's  board  of  directors,  and  was 
sent  to  131  of  the  largest  and  most  prominent  jobbers  or  whole- 
salers in  the  United  States  : 

The  Keystone  Watch  Case  Company 
Nineteenth  and  Brown  Sts. 

-^         jj     _  Philadelphia,  January  15th,  1910. 

We  enclose  herewith  our  new  price  list  which  we  are  mailing  to  the 
retail  trade  to-day.  These  prices  are  subject  to  the  usual  catalogue 
discount  and  the  case  discount  only. 

We  also  enclose  memoranda  of  the  prices  at  which  Boss,  Crescent, 
Planet,  Crown,  and  Silveroid  cases,  and  Excelsior  watches  will  be 
billed  in  future  to  our  jobbers.  These  prices  are  net,  subject  to  the 
cash  discount  only. 

These  prices  are  confidential. 

For  the  best  interests  of  our  business  we  have  determined  to  sell  our 
goods  exclusively  to  jobbers  whom  we  find  voluntarily  conforming  to 
our  wishes  as  to  the  disposition  by  them  of  such  goods. 

We  shall  make  all  specific  sales,  except  of  Howard  watches,  without 
any  restrictions  whatever. 

Whether  or  not  our  wishes  as  hereinafter  stated  be  complied  with, 
we  shall  from  time  to  time  exercise  our  right  to  select  the  jobbers  to 
whom  we  shall  sell  our  goods,  and  we  shall,  irrespective  of  any  past 
dealings,  refuse  to  sell  to  those  jobbers  who,  in  our  opinion,  handle  our 


THE    KEYSTONE   WATCH    CASE  66i 

goods  in  a  manner  detrimental  to  our  interests  or  whose  dealings  with 
us  are  in  any  other  respect  unsatisfactory. 

Our  present  wishes  are  as  follows  : 

First.  Our  goods  bearing  the  following  trade-marks,  to  wit,  Boss, 
Crescent,  Planet,  Crown,  Silveroid,  and  Excelsior,  will  be  sold  by  us  to 
our  jobbers  at  fixed  prices  subject  to  a  cash  discount,  and  we  desire 
that  sales  of  these  goods  by  jobbers,  whether  to  retailers  or  to  jobbers, 
shall  be  without  deviation  at  the  prices  fixed  by  us  for  sales  to  retailers 
subject  only  to  the  cash  discount. 

Second.  Howard  watches  are  sold  only  under  the  terms  of  the 
license  covering  their  sales. 

Third.  On  all  our  other  goods  we  place  no  restrictions  as  to  the 
prices  at  which  they  are  to  be  sold  by  jobbers. 

Fourth.  And  further,  we  desire  that  the  jobbers  to  whom  we  sell 
our  goods  bearing  the  following  trade-marks,  to  wit,  Howard,  Boss, 
Crescent,  Planet,  Crown,  Silveroid,  and  Excelsior,  shall  not  deal  in 
any  watch-cases  other  than  those  manufactured  by  us. 

Fifth.     All  advertisements  of  our  goods  will  be  subject  to  our  ap- 

P  ■  Very  truly  yours. 

The  Keystone  Watch  Case  Company 

Oflficers  or  agents  of  the  company  followed  up  this  circular 
by  visits  to  the  selected  jobbers  —  although  perhaps  not  to  all  of 
them — and  assured  them  that  the  letter  meant  exactly  v^hat  it 
said,  and  that  the  policy  outlined  therein  would  be  rigorously 
carried  out.  And  it  was  insisted  upon  and  was  carried  out. 
Some  of  the  jobbers  assented  to  the  company's  wishes,  and  with 
more  or  less  reluctance  gave  up  buying  from  other  manufac- 
turers, while  the  jobbers  that  refused  to  assent  were  cut  off  from 
the  Keystone  product  altogether,  unless  they  obtained  it  through 
surreptitious  channels. 

We  do  not  think  it  necessary  to  spend  time  over  the  foregoing 
circular.  We  regard  it,  not  as  a  request  but  as  a  threat ;  and 
not  as  an  empty  threat,  but  as  a  real  menace  from  a  strong 
manufacturer.  The  defendant  company  attempts  to  justify  both 
the  circular  and  its  own  conduct  before  and  after  the  circular  was 
issued,  by  the  argument  that  the  selected  jobbers  were  its  "  exclu- 
sive agents,"  and  therefore  were  properly  burdened  with  any  con- 
ditions to  which  they  might  agree.     But  the  relation  of  principal 


662  TRUSTS,  POOLS  AND    CORPORATIONS 

and  agent  did  not  exist  between  the  company  and  the  jobbers. 
They  were  not  agents,  paid  for  their  services  by  salary  or  com- 
mission, and  owing  a  duty  to  report  and  account ;  they  were 
merely  customers  of  the  defendant  company,  who  bought  its  un- 
patented cases  by  a  transaction  of  outright  purchase,  and  thereby 
took  a  complete  title  to  the  cases  and  acquired  an  unrestricted 
right  to  sell.  And,  moreover,  it  should  be  observed  that  they 
were  already  established  customers,  not  only  of  the  defendant 
company,  but  also  of  its  competitors,  and  had  already  become 
trade  outlets  for  every  manufacturer  of  cases  whose  wares  they 
had  been  accustomed  to  buy.  Now,  what  the  defendant  com- 
pany did  was  either  to  close  these  already  existing  and  already 
utilized  outlets,  or  to  narrow  them  materially,  so  far  as  the  cases 
of  its  competitors  were  concerned  ;  and  we  think  the  proposition 
need  not  be  discussed,  that  this  was  pro  tanto  a  direct  and 
unlawful  restraint  of  trade. 

And  it  is  not  sufficient  to  answer,  that  these  competitors 
appear  to  have  withstood  the  attack  with  more  or  less  success, 
and  that  their  total  trade  did  not  always,  or  even  often,  diminish. 
Where  or  how  they  made  up  the  loss  that  they  must  have  sus- 
tained, is  not  material;  it  is  certain  that  they  must  have  lost 
whatever  trade  they  had  previously  enjoyed  with  those  jobbers 
that  yielded  to  the  threat  of  the  defendant's  circular;  and  it 
seems  clear,  therefore,  that  in  this  degree  at  least  there  was  an 
unlawful  restraint  of  trade.  In  other  words,  if  this  section  of 
the  trade  had  not  been  taken  away  from  the  defendant's  com- 
petitors, we  may  reasonably  suppose  that  they  would  have  retained 
it ;  and  this  fact  seems  to  be  a  final  answer  to  much  of  the  evi- 
dence, the  tables  and  lists  of  varying  scope  and  value,  that  have 
been  laid  before  us,  and  were  offered  to  show  that  on  the  whole 
not  much  damage,  if  any,  was  done  by  the  offending  circular 
and  the  defendant's  unlawful  conduct.  A  recent  decision  of  the 
Supreme  Court  on  the  general  subject  of  blacklisting  is  Eastern 
States  &-C.  Assu  v.  Ujiited  States,  opinion  delivered  June  22,  1914. 

The  proportion  of  the  trade  in  filled  cases  that  the  defendant 
company  was  enjoying  from  1903  onward  is  in  dispute,  and  is 
not  altogether  easy  to  determine  with  accuracy  ;  but  we  shall  do 
the  defendant  no  injustice  if  we  adopt  the  figures  of  its  counsel 


THE   KEYSTONE  WATCH   CASE  663 

and  say,  that  "When  the  acquisitions  were  complcted*'tthe  com- 
pany) had  from  50  to  55  per  cent;  when  the  petition  was  filed, 
it  had  from  42  to  47  per  cent."  But  we  have  no  hesitation  in 
adding,  that  even  with  this  proportion  of  the  business  the  de- 
fendant did  not  dominate  the  trade.  It  had  then,  and  has  always 
had,  a  number  of  active  and  successful  rivals,  and  we  see  no 
reason  to  doubt  that  there  was  business  enough  for  all.  No 
complaint  on  the  part  of  the  other  manufacturers  would  have 
been  made  or  would  have  been  justified,  as  far  as  we  can 
determine,  if  the  defendant  had  not  undertaken  the  policy  we 
iiavc  condemned;  and  it  is  essentially  this — -and  one  other 
matter  to  be  spoken  of  presently  —  that  furnishes  the  govern- 
ment with  just  ground  for  complaint.  It  is  probable  that  the 
policy  has  not  been  successful,  save  in  a  limited  degree  and  for 
a  limited  time ;  but  in  our  opinion  it  is  a  plain  restraint  of  trade 
within  the  Act  of  1890,  and  the  government  is  entitled  to  enjoin  it. 

One  or  two  other  matters  referred  to  in  the  pleadings  and  in 
the  evidence  should  be  briefly  referred  to  :  First,  the  defendant 
company's  agreements  with  the  Waltham  and  the  Elgin  move- 
ment companies  respectively.  These  companies  are  not  parties 
to  the  bill,  and  no  relief  is  prayed  against  the  agreements.  The 
subject  was  introduced  by  the  government  merely  as  an  argu- 
ment to  support  its  averment  that  the  defendant  has  been  steadily 
pursuing  the  definite  object  of  restraining  interstate  and  foreign 
trade  in  filled  cases.     The  facts  are  as  follows : 

The  course  of  the  watch  trade  in  the  United  States  differs 
from  its  course  in  foreign  countries.  Here,  both  the  jobber  and 
the  retailer  buy  movements  and  cases  separately,  and  the  retailer 
fits  the  case  and  the  movement  together  as  the  ultimate  consumer 
may  desire.  But  in  foreign  countries  both  the  jobber  and  the 
retailer  deal  in  the  completed  watch.  Efforts  by  the  American 
companies  to  change  the  foreign  course  of  trade  were  unsuccess- 
ful, and  it  was  found  that  the  custom  there  must  be  respected, 
and  that  watches  must  be  exported  in  completed  form.  The 
agreements  referred  to  were  made  with  the  object  of  securing  a 
share  in  this  comparatively  unoccupied  field.  The  Keystone 
company  obtained  from  the  Waltham  and  the  Elgin  companies 
the  exclusive  rig-ht  to  sell  their  movements  in  certain  foreign 


664  TRUSTS,    POOLS   AND    CORPORATIONS 

countries,  fitting  the  movements  into  the  Keystone  cases.  The 
Waltham  contract  covers  the  continent  of  Europe,  with  the 
exception  of  France  and  Spain,  and  in  this  territory  the  Waltham 
company  had  previously  been  doing  but  little  business.  The 
Keystone  cases  were  to  be  made  at  the  Riverside  plant,  and  all 
the  movements  were  sold  to  the  Keystone  company  at  favorable 
prices,  for  such  export  trade  only.  The  Elgin  contract  makes 
the  Keystone  company  the  sole  export  jobber  of  the  Elgin 
movements  except  for  trade  to  Canada,  and  fixes  prices  of  the 
movements  for  export  only,  providing  that  the  Keystone  com- 
pany shall  fit  the  movements  into  its  own  cases,  and  shall  then 
export  the  complete  watch. 

We  see  nothing  unlawful  in  these  contracts.  On  the  contrary, 
they  appear  to  show  a  laudable  effort  to  increase  American  trade 
with  foreign  countries.  They  were  intended  to  help  our  own 
merchants  in  the  struggle  to  enter  new  markets,  and  we  are  un- 
able to  find  that  they  operated  injuriously  to  restrain  the  trade 
of  any  American  competitor. 

The  other  subject  is  the  system  under  which  the  Howard 
watch  was  sold.  The  defendant  company  attempted  to  restrict 
the  prices  at  which  the  wholesaler  or  jobber  might  sell  to  the 
retailer,  and  to  this  end  made  a  direct  agreement  with  the  jobber. 
As  we  understand  the  decisions  such  an  agreement  was  within 
the  company's  lawful  rights.  Certain  material  parts  of  the 
Howard  watch  were  covered  by  bona  fide  patents  taken  out  and 
used  for  a  lawful  purpose,  and  as  the  owner  of  these  patents  the 
company  had  the  right  to  make  a  direct  agreement  with  the 
jobbers  whereby  a  minimum  price  was  fixed  at  which  the  jobber 
might  sell.  Bemetv.  Harroiv  Co.,  i86  U.  S.  70;  Henry  v.  Dick 
Co.y  224  U.  S.  I.  But  the  company  went  further,  and  by  mere 
notice  to  the  retailer,  accompanying  the  box  in  which  the  watch 
was  sold  by  the  jobber,  attempted  to  fix  the  minimum  price  at 
which  the  retailer  might  sell  to  the  consumer.  No  direct  agree- 
ment was  made  with  the  retailer.  When  the  company  sold  the 
watch  to  the  jobber,  it  had  fully  exercised  its  right  to  vend,  and 
"had  no  right  to  use  the  notice  subsequently  given  in  order  to 
control  the  price  at  which  the  retailer  might  sell.  Bauer  v. 
O'  Donnell,  229  U.  S.  i. 


THE    KEYSTONE    WATCH    CASE  665 

We  should  end  the  discussion  at  this  point,  if  it-Wtre  not  for 
the  recent  decision  in  U.  S.  v.  Harvester  Company.  [Reprinted 
herein  at  p.  634,  supra.^  The  majority  opinion,  as  wc  understand 
it,  is  put  upon  the  ground,  that  the  combination  there  in  question 
—  which  was  made  in  1902,  but  was  not  proceeded  against  until 
1912  —  was  and  continued  to  be  unlawful  because  at  the  begin- 
ning it  suppressed  competition  between  corporations  that  con- 
trolled about  80  per  cent  of  the  trade  in  harvesting  machines. 
This  conclusion  was  reached,  although  there  was  no  evidence  of 
coercion  in  the  original  combination,  and  no  evidence  of  oppres- 
sion or  of  actual  injury  to  trade  in  the  subsequent  conduct  of  the 
business.     In  the  principal  opinion,  Judge  Smith  says  : 

While  the  evidence  shows  some  instances  of  attempted  oppression 
of  the  American  trade  by  the  International  and  the  American  com- 
panies, such  cases  are  sporadic,  and  in  general  their  treatment  of 
their  smaller  competitors  has  been  fair  and  just  ;  and,  if  the  Inter- 
national and  America  companies  were  not  in  themselves  unlawful, 
there  is  nothing  in  the  history  of  the  expanding  of  the  lines  of  manu- 
facture so  as  to  make  an  all  the  year  around  business  that  could  be 
condemned. 

The  real  question  is,  whether  the  combination  of  the  companies 
was  unlawful  in  the  beginning,  or  became  so  with  the  additions  sub- 
sequently made. 

And  Judge  Hook  in  his  concurring  opinion  takes  the  same 
ground,  saying : 

The  International  Harvester  Company  is  not  the  result  of  the 
normal  growth  of  the  fair  enterprise  of  an  individual,  a  partnership,  or 
a  corporation.  On  the  contrary  it  was  created  by  combining  five 
great  competing  companies  which  controlled  more  than  80  %  of  the 
trade  in  necessary  farm  implements,  and  it  still  maintains  a  substantial 
dominance.     That  is  the  controlling  fact ;  all  else  is  detail.   .  .  . 

It  is  but  just,  however,  to  say  and  to  make  it  plain  that  in  the 
main  the  business  conduct  of  the  company  toward  its  competitors  and 
the  public  has  been  honorable,  clean,  and  fair.  Some  petty  dis- 
honesties were  tracked  in  at  the  start,  mostly  by  subordinates  who  had 
been  in  the  service  of  the  old  company,  but  they  were  soon  gotten  rid 
of.  In  this  connection  it  should  also  be  said  that  specific  charges  of 
misconduct  were  made  in  the  government's  petition  which  found  no 


666  TRUSTS,    POOLS   AND   CORPORATIONS 

warrant  whatever  in  the  proof.  They  were  of  such  a  character  and 
there  was  so  much  of  them,  apparently  without  foundation,  that  the 
case  is  exceptional  in  that  particular. 

Judge  Sanborn  dissented,  on  the  ground  that  as  the  suit  was 
in  equity  the  court  had  no  power  to  punish  past  violations  of 
the  Anti-Trust  Act,  but  was  only  authorized  to  prevent  and 
enjoin  further  acts  violative  thereof ;  taking  the  position  that 
the  question  for  decision  was,  whether  at  the  beginning  of  the 
suit  in  191 2  the  Harvester  company  was  unreasonably  restrain- 
ing, or  attempting  to  restrain  or  monopolize,  interstate  or  foreign 
trade.  In  considering  this  question  he  laid  stress  upon  the 
argument  that  the  statute  forbids  such  acts  only  as  injure  the 
public  unduly  in  some  of  the  following  particulars : 

(i)  raising  the  prices  to  the  consumer  of  the  articles  they  affect; 

(2)  limiting  their  production  ; 

(3)  deteriorating  their  quality  ; 

(4)  decreasing  the  wages  of  the  laborers,  and  the  prices  of  the  ma- 
terials required  to  produce  them  ;  or 

(5)  practicing  unfair  or  oppressive  treatment  of  competitors. 

After  reviewing  the  evidence  he  came  to  the  conclusion  on 
the  facts,  that  for  at  least  seven  years  before  the  suit  was  begun 
the  defendant  had  not  been  injuring  the  public  either  by  un- 
reasonably restricting  competition,  or  by  acquiring  an  undue 
share  of  the  business,  or  by  excluding  other  manufacturers  or 
dealers,  or  by  practices  that  were  unjust  or  unfair  or  oppressive 
to  competitors,  or  by  raising  prices  to  the  consumer,  or  by  limit- 
ing production  of  the  articles  manufactured,  or  by  deteriorating 
the  quality  of  such  articles,  or  by  decreasing  the  wages  of  labor, 
or  by  reducing  prices  of  raw  materials ;  and  that  the  defendant 
was  not  threatening  to  do  these  things  in  the  future.  On  the 
contrary  he  found  that  the  acts  complained  of  by  the  govern- 
ment had  had  the  opposite  effect,  and  had  resulted  in  benefit  to 
competitors,  to  consumers,  to  laborers,  and  to  the  producers  of 
raw  materials. 

With  this  difference  of  opinion  in  a  strong  and  highly  re- 
spected court,  it  may  perhaps  have  some  value  if  (with  some 


THE   KEYSTONE   WATCH   CASE  667 

hesitation)  we  add  our  own  contribution  to  the  disca$?ion  of  this 
vastly  important  and  much  considered  subject.  We  shall  try  to 
state  our  views  briefly,  although  it  may  conduce  to  clearness  if  we 
outHne  the  subject  from  the  beginning.  The  Act  of  1890  is 
directed  against  restraint  of  interstate  or  foreign  trade ;  that  is, 
against  restraining  the  business  of  buying  or  selling  for  gain, 
whenever  the  transaction  forms  a  part  of  commerce  among  the 
states  or  with  foreign  countries.  Trade  may  be  restrained  — 
that  is,  hindered,  or  obstructed,  or  destroyed  —  in  many  ways 
and  by  many  devices,  but  these  are  all  covered  by  the  first  and 
second  sections  of  the  Act.  In  these  sections  two  classes  or 
prohibited  acts  are  described  ;  ( i )  the  concerted  action  of  two 
or  more  persons,  which  may  take  the  form  of  a  contract,  a  com- 
bination in  whatever  form,  or  a  conspiracy;  and  (2)  monopoly, 
or  the  attempt  to  monopolize,  which  may  be  the  act  of  one 
person  alone,  or  of  more  than  one.  These  two  classes  are 
intended  to  be  all-embracing,  and  thus  far  in  the  history  of  the 
statute  no  variety  of  device  has  escaped  their  sweep. 

In  the  usual  meaning  of  the  word  monopoly  may  be  said  to 
be  the  acquisition  of  something  for  one's  self,  and  perhaps  it 
would  be  applied  most  appropriately  when  the  whole  of  a  given 
trade  is  acquired.  Practically,  however,  we  need  not  contem- 
plate so  extreme  a  case  of  control  or  acquisition,  and  indeed  the 
Act  itself  is  not  primarily  concerned  with  an  offense  so  rare. 
The  second  section  deals  with  the  monopolizing,  or  the  attempt  at 
monopolizing,  "  any  part  "  of  the  trade  or  commerce  referred  to  ; 
and  it  is  clear  enough  therefore  that  Congress  had  chiefly  in 
mind,  not  so  much  the  monopoly  of  a  whole  (although  the  language 
might  properly  be  construed  to  cover  that  also),  as  the  much 
more  likely  case  of  the  monopoly  of  a  part  smaller  than  the 
whole.  But  the  question  immediately  arises  —  at  what  point 
does  a  business  become  so  large  that  the  statute  condemns  it.-' 
Or  —  to  state  the  question  in  other  words — is  the  mere  size  of  a 
business  enough  to  bring  it  within  the  disapproval  of  the  Act  .-* 
Section  2  gives  us  no  help,  for  "any"  part  if  strictly  construed 
might  range  from  a  minute  and  inconsiderable  fraction,  to  a 
part  just  less  than  the  whole.  If  therefore  a  merchant,  either 
an  individual  or  a  corporation,  by  the  most  commendable  zeal 


668  TRUSTS,    POOLS   AND   CORPORATIONS 

and  industry  should  succeed  in  diverting  to  himself  a  very  small 
part  of  a  competitor's  business,  he  would  be  monopolizing  a 
"part"  of  the  trade,  and  would  be  condemned  by  the  letter  of 
the  Act.  And  in  like  manner,  if  the  statute  is  using  the  strict 
meaning  of  "  restraint  of  trade,"  no  merchant  could  act  in  com- 
bination with  his  own  partner  in  successful  competition  for  part 
of  a  rival's  business,  even  by  the  fairest  and  most  honorable 
means,  except  at  the  risk  of  "restraining"  trade.  Further 
examples  are  needless ;  many  more  might  be  given.  Clearly, 
therefore,  as  it  seems  to  us,  the  Act  could  not  have  been  in- 
tended to  bear  a  meaning  so  subversive ;  and  it  seems  plain  that 
the  supreme  court  was  abundantly  justified  in  turning  to  the 
rule  of  reason,  and  in  holding  that  of  necessity  Congress  must 
have  been  dealing  with  undue  or  unreasonable  restraints  of  trade, 
whether  such  restraints  take  the  form  of  monopolies  in  whole  or 
in  part,  or  of  concerted  action  under  any  guise  whatever. 

But  to  say  that  a  transaction  is  undue  or  unreasonable  im- 
plies that  it  has  been  judged  by  a  standard.  The  standard  of 
course  is  reason,  but  various  questions  at  once  present  them- 
selves for  answer.  For  example,  who  is  to  apply  the  standard  ? 
The  legislation  of  Congress  does  not  attempt  the  task  itself,  and 
under  our  system  of  government  the  duty  must  of  necessity  be 
undertaken  by  the  courts,  who  must  judge  each  case  according 
to  its  own  facts.  But  when  such  a  question  comes  to  be  con- 
sidered, where  is  a  court  to  find  the  standard  of  reason .''  It 
seems  to  us  that  it  must  be  found  in  the  gradually  accumulated 
results  of  general  experience  and  observation,  in  the  gathered 
wisdom  of  the  community,  for  this  is  the  product  of  a  common 
and  a  prolonged  effort  by  men  who  theorize  and  by  practical 
men  alike  to  deal  as  fairly,  as  justly,  and  as  equitably,  as  may 
be  possible  with  situations  that  are  often  obscure  and  compli- 
cated, and  of  high  importance  to  large  classes  and  to  many  in- 
dividuals. Obviously  a  standard  should  have  a  true  relation  to 
the  subject  measured  ;  and,  since  the  inquiry  here  is,  whether  in 
a  given  case  trade  is  likely  to  be,  or  has  actually  been,  unduly 
restrained,  reason  can  answer  the  question  only  by  going  to  the 
facts  of  life  and  drawing  upon  the  accumulated  store  of  knowledge. 

Now,  the  world  has  already  learned   some  lessons  that  have 


THE    KEYSTONE    WATCH    CASE  669 

become  part  of  its  common  stock.  One  of  them  is^-feat,  when 
men-  announce  their  intention  in  entering  upon  a  given  transac- 
tion, declaring  it  to  be  the  accompHshment  of  a  particular  ob- 
ject, their  declaration  may  usually  be  accepted  as  correct.  Not 
always,  of  course,  but  as  a  rule;  and  especially  is  this  true,  if 
the  concealment  of  their  intention  would  advance  their  interest. 
Let  us  suppose  that  several  persons  combine  to  do  certain  acts 
that  may,  or  may  not,  have  the  effect  of  restraining  trade.  If 
they  expressly  declare  their  intention  to  be  the  restraint  of  trade, 
we  shall  hardly  go  wrong  in  beheving  them.  And  if  such  a  sit- 
uation is  unlikely,  a  better  illustration  may  be  found  in  suppos- 
ing that  they  agree  to  do  the  acts,  but  say  nothing  about  their 
intention.  In  that  event,  if  according  to  the  common  course  of 
experience  and  observation  the  acts  proposed  will  certainly 
have  the  result  of  restraining  trade,  their  unexpressed  intention 
will  be  of  no  consequence  whatever  ;  neither  will  it  be  of  any 
consequence,  if  the  reasonable  probability  be  that  trade  will  be 
restrained  by  the  proposed  conduct. 

But  another  and  ordinarily  a  better  way  of  determining 
whether  a  course  of  conduct  under  examination  is  in  restraint 
of  trade  is  sometimes  available,  and  that  is,  by  considering  its 
actual  effect.  It  goes  without  saying  that  such  a  test  can  only 
be  applied  after  the  course  in  question  has  actually  been  carried 
out  in  some  degree,  has  actually  been  tried  by  experience ;  and 
this  leads  to  the  further  question  —  When  should  the  standard 
of  reasonableness  be  applied  ?  Evidently  this  will  depend  on 
the  time  when  the  question  is  submitted  for  decision.  This 
time  may  either  precede  the  proposed  course  of  conduct,  or  it 
may  follow  the  beginning  of  such  a  course  so  quickly  that  no 
body  of  experience,  or  no  sufficient  body,  has  yet  come  into 
existence.  In  that  event,  the  nature  of  things  compels  the 
court  to  enter  the  field  of  prophecy,  or  ot  probable  anticipation. 
In  such  a  situation,  nothing  else  can  be  done.  A  court  can 
only  deal  with  the  situations  that  are  laid  before  it,  and  in  the 
case  supposed  it  must  avail  itself  of  whatever  light  may  be  had, 
and  must  exercise  its  best  judgment  with  such  aid  as  may  be  at 
hand.  But,  if  the  suit  be  deferred  until  the  lapse  of  time  and 
the  actual  effect  of  the  conduct  complained  of  have  permitted 


6/0  TRUSTS,    POOLS   AND    CORPORATIONS 

facts  to  accumulate  and  have  tried  the  project  in  question  by 
the  test  of  experience,  we  can  hardly  doubt  that  prophecy  or 
probable  anticipation  should  be  considered  inferior  in  force  to 
the  evidence  of  what  has  actually  taken  place.  In  this  world 
we  must  do  our  best  with  the  means  at  our  disposal.  Even  if 
prophets  are  always  in  danger  of  being  discredited  by  the  event, 
we  are  sometimes  compelled  to  speculate  about  the  future  ;  and 
our  duty  then  is  to  check  our  speculations  as  much  as  possible 
by  taking  account  of  such  probabilities  as  may  arise  from  past 
experience  and  observation.  In  like  manner,  when  we  are  face 
to  face  with  what  has  actually  happened,  we  may  safely  lay 
prophecy  aside,  in  order  to  accept  the  services  of  a  better  guide, 
one  that  can  be  relied  upon  with  a  firmer  confidence. 

And  this  brings  us  to  the  next  question,  no  matter  at  what 
point  of  time  the  inquiry  may  be  undertaken ;  namely,  what  are 
the  ordinary  marks  of  such  a  course  of  conduct  as  may  properly 
be  condemned  as  a  restraint  of  trade .''  Without  attempting  to 
enumerate  them  exhaustively,  a  few  general  observations  may 
be  made.  Trade  is  restrained  by  putting  hindrances  in  the  way 
of  the  persons  that  conduct  it.  Whatever  makes  it  more  diffi- 
cult for  such  persons  to  carry  on  their  business,  restrains  them, 
and  restrains  their  trade ;  but  (to  speak  generally)  as  every  suc- 
cessful effort  of  a  merchant  to  increase  his  own  trade  makes  it 
harder  for  his  rivals  to  succeed  and  therefore  restrains  their 
trade;  and  as  Congress  certainly  did  not  intend  to  condemn  the 
proper  exercise  of  business  zeal  and  energy,  we  must  recur  to 
the  rule  of  reason  and  ask  —  not  merely  what  is  restraint  of 
trade,  but  what  is  unreasonable  restraint  of  trade  ?  On  this  sub- 
ject we  are  certainly  able  to  say  some  things  with  confidence. 
Competitors  must  not  be  oppressed  or  coerced;  fraudulent  or 
unfair  or  oppressive  rivalry  must  not  be  pursued.  And  if  these 
words  are  criticized  as  too  general,  we  may  reply  that  such  gen- 
erality is  apparently  unavoidable  as  some  recent  legislation  of 
Congress  testifies,  and  moreover  we  may  safely  deny  that  the 
words  are  too  vague  for  satisfactory  use ;  for  it  must  be  remem- 
bered, that  the  common  agreement  of  moral  opinion  in  the  com- 
munity furnishes  an  adequate  guide  to  their  practical  meaning 
and  their  practical  application.     They  are  not  Hkely  to  be  mis- 


THE    KEYSTONE   WATCH    CASE  671 

apprehended  or  misapplied.  Then,  too,  prices  mustr^ot  be  ar- 
bitrarily fixed  or  maintained.  Ordinarily  the  play  of  the  great 
forces  that  influence  the  market  will  determine  prices,  and  these 
forces  must  be  allowed  to  have  their  unhindered  effect.  And  a 
corollary  from  this  consideration  is  that  an  artificial  scarcity 
must  not  be  produced,  since  the  effect  of  such  a  scarcity  is  to 
raise  prices  to  the  consumer.  Moreover,  the  public  is  also  in- 
jured if  quality  be  impaired  so  that  the  old  price  buys  a  worse 
article ;  and  other  injuries  are  done,  if  the  wages  of  the  laborer 
be  arbitrarily  reduced,  and  if  the  price  of  raw  material  be  arti- 
ficially depressed- 

In  the  complexity  of  human  affairs  there  may  be  other 
methods  of  unreasonably  restraining  trade,  and  these  may  be 
left  for  consideration  as  they  are  made  to  appear  ;  but  those 
already  referred  to  are  the  methods  that  have  usually  been  em-' 
ployed,  and  we  need  not  enter  the  field  of  conjecture.  Now,  if 
all  or  some  of  these  marks  of  unlawful  restraint  be  present  or 
may  fairly  be  expected,  the  statute  requires  the  application  of 
an  appropriate  remedy ;  but,  if  none  of  them  be  present  after 
sufficient  experience  has  shown  what  will  actually  happen,  on 
what  satisfactory  ground  is  condemnation  to  be  pronounced  .'' 
Not,  we  think,  merely  on  the  ground  of  size.  As  population 
has  swelled,  and  as  vast  aggregations  of  men  have  multiplied 
their  wants,  the  inevitable  trend  of  modern  affairs  has  called  for 
large  business  enterprises  as  well  as  for  small ;  and  we  think  it 
no  more  than  reasonable  to  say  that  when  a  large  business  has 
proved  itself  to  be  beneficial  and  not  harmful  to  the  community 
it  should  not  be  condemned  merely  because  it  is  large.  We  do 
not  consider,  and  we  do  not  deny,  the  right  of  a  nation  to  adopt 
such  a  legislative  policy  in  this  respect  as  its  constitution  may 
permit ;  but,  until  a  policy  of  limitation  be  so  adopted,  we  see 
no  possible  test  of  reasonableness  to  be  applied  except  such 
tests  (and  those  like  them)  as  have  already  been  sufficiently  re- 
ferred to.  And,  from  whichever  side  the  subject  may  be  ap- 
proached —  from  the  side  of  what  is  likely  to  happen,  or  from 
the  side  of  actual  experience  —  the  standard  of  reasonableness 
should  be  applied  according  to  the  facts  and  circumstances  of 
the  particular  case  under  examination. 


6/2  TRUSTS,    POOLS   AND    CORPORATIONS 

As  will  no  doubt  be  observed,  we  have  already  applied  the 
rules  we  have  been  considering  to  the  case  in  hand,  and  have 
expressed  our  opinion  concerning  the  several  acts  of  the  defend- 
ant company  that  are  attacked  by  the  government,  so  that  we 
need  say  nothing  further  except  a  word  concerning  the  relief 
that  should  be  granted.  The  defendant  declares  that  the  policy 
of  boycott  had  been  given  up  before  the  bill  was  filed  —  and 
there  is  some  testimony  to  this  effect  —  but  the  circular  has 
never  been  withdrawn  or  negatived,  and  the  company's  resolu- 
tion of  January,  1910,  has  never  been  rescinded.  We  feel  no 
hesitation  in  acting  on  the  assumption  that  the  policy  was  at 
least  formally  in  force  when  the  government  began  the  suit  now 
before  us,  and  we  have  no  doubt  that  an  injunction  should  be 
granted.  But  we  see  no  sufficient  evidence  that  the  public  in- 
terest requires  us  to  break ,  up  the  existing  corporate  entity : 
U.  S.  V.  Great  Lakes  Toiuing  Company,  208  Fed.  746.  The 
record  satisfies  us  that  the  watch  case  business  is  not  suffering 
from  the  absence  of  live  and  healthy  competition,  and  except  in 
the  directions  already  mentioned  —  namely,  the  retail  sales  of  the 
Howard  watch,  and  the  policy  of  boycott  —  we  think  the  court  is 
not  called  upon  to  interfere.  But,  in  case  conditions  in  the  future 
should  make  it  desirable  for  the  government  to  ask  for  additional 
relief,  even  to  the  point  of  breaking  up  the  defendant  corporation, 
we  shall  retain  jurisdiction  of  the  bill,  with  leave  to  the  govern- 
ment to  take  such  action  hereafter  as  may  seem  appropriate. 


THE   NATIONAL   CASH    REGISTER   CASE^ 

The  proceedings  against  this  substantial  monopoly  are  significant  because 
of  their  persistence  ;  because  of  their  nature,  being  criminal  rather  than  civil ; 
and  because  they  disclose  so  clearly  the  oppressive  tactics  once  prevalent 
which  were  not  then  regarded  even  as  bad  form  in  business.  Yet  they  so  far 
shocked  even  the  Harrison  Administration,  that  an  indictment  was  returned 
in  1893  against  Patterson,  then  President.  But  the  case  was  allowed  by  the 
Attorney  General  to  lapse,  "because  of  reconciliation  of  complaining  witness 
with  defendants."     The  lion  having  swallowed  the  lamb,  in  fact,  professed 

1  Patterson  et  al.  v.  U.  S.,  222  Fed.  Rep.  599;   rendered  March  13,  1915. 
Omissions  are  not  indicated  in  the  text. 


NATIONAL  CASH    REGISTER   CASE  673 

contentment  with  its  included  state.  So  little  at  tliat  time  was  an  offense 
against  one  regarded  as  an  injury  to  all  !  These  later  proceedings  were  in- 
stituted, civilly  in  191 1  and  criminally  a  year  later,  against  Patterson  and 
twenty-nine  other  employees  of  the  company.  The  trial  resulted  in  a  verdict 
of  guilty  as  to  29  out  of  30  of  the  defendants.  Fines  aggregating  $135,000 
were  assessed  and  jail  sentences  up  to  a  year  for  Patterson  were  imposed. 
The  opinion  herewith  passes  upon  the  exceptions  taken  and  the  technical 
irregularities  of  the  first  trial.  It  was  affirmed  by  the  Supreme  Court  in  June, 
191 5.  The  highly  technical  portions  which  deal  with  flaws  in  the  indictment 
and  defects  in  procedure  are  omitted,  as  of  little  interest  either  to  the  econo- 
mist, the  moralist  or  the  citizen  at  large.  Nor  should  the  mere  fact  that  the 
statute  of  limitations  permits  the  defendants  to  go  scot  free  close  our  eyes  to 
the  enormity  of  the  offenses  against  public  decency  which  were  committed. 
Not  even  the  avowedly  high  standards  of  efficiency  and  fair  dealing  which 
now  obtain,  can  obscure  the  fact  that  the  National  Cash  Register  Company 
was  for  many  years  an  industrial  pirate.  —  Ed. 

This  is  a  criminal  prosecution  under  Act  July  2,  1890,  26  Stat.  209, 
c.  647.  The  indictment  was  found  February  22,  191 2,  and  contains 
three  counts.  The  offense  which  the  first  charges  is  that  of  engaging 
in  a  conspiracy  in  restraint  of  interstate  trade  and  commerce  under  the 
first  section  of  the  act,  and  that  which  each  of  the  other  two  charges  is 
monopolizing  a  part  of  such  trade  and  commerce  under  the  second  sec- 
tion. The  defendants  were  30  in  number.  Each,  for  many  years,  had 
been  connected  with  the  National  Cash  Register  Company,  a  corporation 
engaged  in  the  business  of  manufacturing  and  selling  cash  registers, 
with  its  principal  place  of  business  at  Dayton,  Ohio,  within  the  district 
of  the  lower  court,  in  the  capacity  of  an  officer  or  agent.  All  but  four 
were  so  connected  when  the  indictment  was  found  ;  those  four  ceased 
their  connection,  three  in  1910  and  one  in  191 1  ;  and  four  of  them  had 
been  connected  for  at  least  20  years  continuously  prior  to  its  finding. 
The  conspiracy  with  which  they  were  charged  was  directed  against 
competitors  of  that  company,  and  the  monopolizing  was  the  exclusion 
of  its  competitors  from  such  trade  and  commerce  for  its  benefit.  Trial 
was  had,  and  all  the  defendants  save  one  were  found  guilty  under  each 
count.  Motion  for  new  trial  was  sustained  as  to  one,  and  the  indict- 
ment was  nollied  as  to  him.  Sentence  as  to  another  was  deferred 
because  of  sickness,  and  pronounced  as  to  other  27,  who  are  the 
plaintiffs  in  error  herein.  The  sentence  of  one,  John  H.  Patterson, 
president,  was  a  fine  of  $5000  and  confinement  in  jail  for  one  year ; 
that  of  23,  such  confinement  for  one  year;  and  that  of  three  for  nine 
months. 


674  TRUSTS,   POOLS  AND   CORPORATIONS 

The  first  count  is  quite  long ;  each  of  the  other  two  is  short.  The 
first  makes  certain  introductory  statements  before  charging  the  offense 
and  alleging  the  facts,  the  doing  of  which  it  claimed  constituted  its 
commission.     Those  statements  are  :  [Omitted.] 

These  introductory  statements  were  followed  by  a  charge  of  the, 
offense  in  general  terms. 

From  this  charge  in  "  generic  terms  "  the  count  descended  to  "  par- 
ticulars." The  eleven  things  by  means  of  which  the  defendants  con- 
spired to  accomplish  those  objects  may  thus  be  summarized : 

(i)  Inducing,  hiring,  and  bribing  employes  of  the  competitors  of  the 
National  Cash  Register  Company,  named,  to  disclose  to  it  the  secrets 
of  their  business,  particularly  as  to  prospective  buyers,  customers  who 
had  ordered,  customers  who  had  not  fully  paid,  shipments  to  customers, 
agents,  and  dealers,  volume  of  business,  places  where  done,  inventions, 
financial  conditions,  and  connections. 

(2)  Inducing,  hiring,  and  bribing  employes  of  carters,  truckmen, 
express  companies,  railroad  companies,  and  telephone  and  telegraph 
companies  to  disclose  to  it  the  secrets  of  their  employers  pertaining  to 
the  carriage  and  transportation  of  the  cash  registers  of  such  competitors. 

(3)  Instructing  and  requiring  all  its  sales  agents  to  ascertain  and  re- 
port all  facts  and  details  pertaining  to  the  business  of  such  competitors, 
and  particularly  of  competitors  coming  into  the  competitive  field. 

(4)  Using  its  influence  and  that  of  its  agents  with,  and  the  making 
of  unwarranted  and  false  statements  to,  banking  and  other  institutions, 
to  injure  the  credit  of  such  competitors  and  prevent  them  from  securing 
accommodation  of  money,  credit,  and  supplies. 

(5)  First.  Instructing  and  requiring  all  its  sales  agents  to  interfere 
with,  obstruct,  and  prevent,  in  every  way  possible,  sales  of  such  com- 
petitive cash  registers  by  such  competitors,  and  their  agents  and 
dealers  in  cash  registers,  and  by  any  and  all  means  to  bring  about 
sales  of  its  cash  registers,  and  the  displacement  of  such  competitive 
cash  registers,  and  the  substitution  of  its  genuine  cash  registers  there- 
for in  the  hands  of  users  of  cash  registers,  and  particularly  {a)  by 
making  to  prospective  purchasers  of  such  competitive  cash  registers 
false  statements  derogatory  of  same,  and  reflecting  injuriously  upon 
the  business  character  and  financial  credit  of  such  competitors,  and 
their  ability  and  intention  to  perform  their  undertakings  and  make 
good  their  warranties  and  promises,  and  offering  to  sell  to  them  cash 
registers  at  prices  much  less  than  the  regular  and  standard  prices  and 
on  unusually  favorable  terms  as  to  payment ;  {b)  by  inducing  persons 
who  have  already  ordered  such  competitive  cash  registers  to  cancel 


NATIONAL   CASH    REGISTER   CASE  675 

their  orders  and  purchase  its  cash  registers  through  sucnstatemeTits 
and  ofifers ;  (c)  by  inducing  purchasers  of  such  competitive  cash 
registers  who  had  only  partially  paid  therefor  to  repudiate  their  con- 
tracts of  purchase  through  such  statements  and  offers  and  allowing 
them  the  amount  they  had  paid  ;  (d)  by  inducing  purchasers  of  such 
registers,  whether  they  had  paid  in  full  or  not,  to  surrender  them  to  it, 
in  exchange  for  its  registers  for  the  purpose  of  exhibiting  them  in  the 
windows  of  its  stores  where  its  registers  were  on  sale,  bearing  placards 
with  the  word  "  Junk  "  or  "  For  Sale  at  Thirty  Cents  on  the  Dollar  " 
printed  thereon  ;  (<f)  by  offering,  to  prospective  purchasers  of  such 
registers,  registers  in  similitude  of  any  competitive  registers  they  w-ere 
contemplating  buying,  at  a  price  much  lower  than  the  regular  price 
thereof,  and  in  cases  at  much  less  than  the  manufacturer's  costs, 
which  registers  so  offered  were  manufactured  by  it  solely  as  a  so-called 
"  knocker,"  so  as  to  cause  such  purchasers  to  believe  that  it  was  of 
such  cheap  and  poor  construction  that  it  was  a  waste  of  money  to  pur- 
chase it  or  such  registers ;  (/)  and  by  offering  to  prospective  pur- 
chasers of  such  registers  such  knockers  with  weak  and  defective 
mechanism,  and  claiming  that  the  registers  they  were  contemplating 
buying  had  the  same  weak  and  defective  mechanism.  Second.  And 
instructing  and  requiring  its  sales  agents  secretly  to  weaken  and  injure 
the  interior  mechanism,  and  remove  and  destroy  parts  of  such  mechan- 
ism of  the  cash  registers  of  such  competitors  in  actual  use  by  purchasers, 
and  thereby  to  cause  them  to  become  dissatisfied  and  substitute  for 
them  its  cash  registers. 

(6)  Making  by  it  to  such  competitors  and  to  purchasers  and  prospec- 
tive purchasers  of  their  cash  registers  of  threats  to  begin  suits  in  the 
courts  against  them  for  infringing  and  having  infringed  its  patent 
rights  pertaining  to  its  cash  registers,  when,  as  each  of  them  well  knew, 
no  such  patent  rights  existed,  and  no  such  suit  was  contemplated  or 
would  really  be  begun,  and  such  threats  were  made  merely  to  harass 
such  competitors,  purchasers,  and  prospective  purchasers,  and  deter 
such  competitors  from  manufacturing  and  selling  such  competitive 
cash  registers  in  such  interstate  trade  and  commerce  and  such  prospec- 
tive purchasers  from  buying  and  using  such  competitive  cash  registers. 

(7)  Beginning,  in  other  cases,  by  it  against  such  competitors  and 
against  purchasers  of  such  competitive  cash  registers  of  suits  for  in- 
fringement of  its  patent  rights  pertaining  to  its  cash  registers,  when, 
in  those  cases,  they  each  well  knew  no  patents  upon  which  such  suits 
could  be  maintained  were  in  existence  or  owned  or  controlled  by  it, 
and   when,  as    they  each  well  knew,  none  of   those  suits  would   be 


6/6  TRUSTS,   POOLS  AND   CORPORATIONS 

further  pressed,  but  all  such  suits  would  be  kept  pending  only  as 
long  as  they  served  the  purpose  of  harassing  such  competitors  and 
purchasers. 

(8)  Organizing  cash  register  manufacturing  concerns  and  cash 
register  sales  concerns  and  maintaining  them,  ostensibly  as  competitors 
of  their  company,  but  in  fact  as  convenient  instruments  for  use  in  gain- 
ing the  confidence  and  obtaining  the  business  secrets  of  competitors 
and  accomplishing  the  objects  of  the  conspiracy  and  making  such  use 
of  competitive  concerns  from  time  to  time  acquired  by  it. 

(9)  Inducing  by  offers  of  much  greater  compensation  the  agents 
and  servants  of  such  competitors  and  dealers  patronizing  them  to  leave 
their  employment  and  cease  patronizing  them  and  to  enter  its  employ- 
ment and  patronize  it. 

(10)  Applying  and  causing  application  to  be  made  for  patents  upon 
the  cash  registers  and  the  improvements  thereupon  of  such  competitors, 
for  the  purpose  of  harassing  them  by  interference  proceedings  and 
suits  and  threats  to  institute  such  proceedings. 

(11)  Using  of  or  originating  and  using  of  and  instructing  and 
requiring  of  its  agents  and  sales  agents  to  use  of  or  to  originate 
and  use  such  other  unfair  means  excluding  other  concerns  besides  it 
from  engaging  in  said  interstate  trade  as  might  at  any  time  become  or 
appear  to  them  or  those  agents  or  sales  agents  to  be  necessary  or  con- 
venient to  accomplish  the  object  of  the  conspiracy,  a  description  of 
which  means  other  than  already  described  the  grand  jury  are  unable 
to  set  forth,  because  such  means  were  so  numerous  in  kind  and  shift- 
ing in  character  as  to  make  such  description  impossible. 

We  think  it  clear  that  there  was  substantial  evidence  to  the 
effect  that  there  v^as  a  conspiracy  on  the  part  of  those  ofificers 
and  agents  of  the  National  company  who  then  had  to  do  with 
competition  against  most,  if  not  all,  of  the  competitors  named 
who  were  in  existence  before  the  American  of  Columbus  came 
into  existence,  which  was  not  later  than  the  early  part  of  1907, 
except  the  Peninsular,  Burdick-Corbin,  and  Dial,  as  long  as  they 
were  in  existence  within  the  twenty-year  period,  and  that  this 
conspiracy  included  the  use  of  some,  if  not  all,  of  the  means  speci- 
fied, and  other  means  not  specified  aimed  to  be  covered  by  the 
eleventh  item,  and  that  when  that  company  came  into  existence 
there  was  a  generic  conspiracy  against  all  competitors,  at  least 
all  who  might  endanger  the  National's  supremacy,  which  generic 


NATIONAL   CASH    REGISTER   CASE  677 

conspiracy  had  been  in  existence  at  least  from  the  be^nning  of 
the  twenty  years.  In  an  issue  of  a  pubHcation  of  the  company 
seemingly  for  distribution  amongst  its  officers  and  agents,  of 
date  May  i,  1892,  occur  these  statements: 

If  the  opposition  knew  what  is  in  store  for  them,  they  would  not 
waste  any  more  time  and  money  staying  in  the  business.  They  are 
all  beginning  to  realize  that  there  is  no  hope  for  them. 

It  is  only  a  question  of  whether  we  propose  to  spend  the  money  to 
keep  down  opposition.  If  we  continue,  it  is  absolutely  certain  no 
opposition  company  can  stand  against  this  company  and  its  agents. 
If  necessary,  we  will  spend  five  times  as  much  money  as  we  have 
already  done,  in  order  to  down  opposition.  If  they  really  believe 
this,  they  will  throw  up  the  sponge  and  quit. 

We  are  receiving  overtures  to  buy  out  opposition.  We  will  not  buy 
them  out.     We  do  not  buy  out ;  we  knock  out. 

In  an  issue  August  i,  1895,  occurs  this  statement:  "We  are 
determined  to  absolutely  control  the  cash  register  business." 

And  in  an  issue  of  date  March  25,  1897,  after  setting  forth 
the  policy  of  the  company  of  frankly  informing  a  competitor 
of  the  purpose  to  drive  him  out  of  business,  occurs  this  state- 
ment : 

This,  it  is  true,  is  what  is  called  "  securing  a  monopoly  "  ;  but  we 
think  there  can  be  no  possible  economic  or  other  objection  to  it. 
Cash  registers  are  not  a  necessity  of  life.  Any  one  who  chooses 
can  do  business  without  them,  thus  contributing  •  nothing  to  the 
"  monopoly." 

It  is  then  stated  that  "this  monopoly"  "is  managed  upon  a 
liberal  and  broad-minded  plan."  And  at  a  convention  of  the 
district  managers  held  at  Dayton,  July  22,  1907,  the  defendant 
John  H.  Patterson,  president,  thus  expressed  himself  to  them  : 

We  want  Mr.  Anderson  of  the  competition  department  to  give  you 
a  little  idea  of  how  we  are  going  to  control  competition.  We  want 
Mr.  Hay  ward  also  to  give  you  a  little  talk.  We  want  Mr.  Muzzy  to 
tell  you  how  we  are  going  to  absolutely  control  the  competition  of  the 
world,  because  we  want  you  to  feel  this  way.  The  first  thing  we  aim 
to  do  is  to  keep  down  competition. 


6/8  TRUSTS,    POOLS   AND   CORPORATIONS 

And  again  : 

I  asked  the  Standard  Oil  Company  what  was  the  secret  of  their 
success,  and  they  said  this  question  could  be  answered  in  a  very  few 
words.  Men,  nothing  but  men  ;  men  well  organized  ;  they  will  keep 
down  competition  and  make  things  succeed. 

In  the  publications  of  the  company  and  in  the  communications 
between  the  officers  and  agents  having  to  do  with  competition, 
terms  of  warfare  were  not  infrequently  used,  such  as  battle, 
fight,  enemy,  ammunition,  shot,  whipped,  victory,  and  flags 
flying.  During  that  time  all  the  competitors  named  then  in 
existence  retired  from  the  field.  The  American  of  Philadelphia, 
Boston,  Hallwood,  International,  Hubinger  &  Carroll,  and 
Latimer  quit.  The  National  does  not  seem  to  have  been  the 
cause  of  the  Latimer  quitting.  The  Century,  Chicago,  Cuckoo, 
Globe,  Ideal,  Kruse,  Lamson,  Metropolitan,  Navy,  Osborn, 
Standard,  Simplex,  Sun,  Toledo,  Union,  and  VVeller  sold  out  to 
the  National,  and  it  discontinued  their  business.  The  American 
of  Philadelphia  and  Boston  quit  because  of  infringement  suits 
brought  against  them  by  the  National,  in  which  it  was  success- 
ful. The  decisions  in  its  favor  against  them  are  [citations 
omitted].  The  result  of  this  litigation  may  possibly  have  had 
something  to  do  with  other  competitors  quitting  or  selling  out. 
Infringement  suits  were  brought  against  most,  if  not  all,  the 
others,  and  these  suits  had  more  or  less  to  do  with  their  quitting 
or  selling  out.  There  was  evidence  tending  to  show  in  some  of 
these  instances  at  least  that  the  claim  of  infringement  was  un- 
founded and  known  to  be  so,  and  that  the  suits  for  infringe- 
ment were  not  brought  in  good  faith,  but  for  the  sole  purpose 
of  aiding  in  driving  the  competitors  from  the  field.  The  govern- 
ment claims  that  such  was  the  case  in  all  instances.  In  most, 
if  not  all,  of  these  instances,  some,  if  not  all,  of  the  other  means 
were  resorted  to,  and  it  is  not  unlikely  that  in  some  instances  at 
least  they  were  more  effective  than  the  suits.  And  such  means 
were  resorted  to  in  some,  if  not  all,  the  cases  where  the  suits 
were  successful.  The  Hallwood,  International,  Century,  Chi- 
cago, Cuckoo,  Globe,  Ideal,  Metropolitan,  Navy,  Osborn, 
Simplex,  Sun,  Toledo,  Union,  and  Western  retired  from  the 
field  during  the  seven  years  prior  to  1907.     Most,  if  not  all,  of 


NATIONAL   CASH    REGISTER   CASE  679 

the  others  retired  before  then,  and  mainly  in  tlic  eariy  part  of 
the  twenty-year  period. 

In  justice  to  the  National  company  and  the  defendants  it 
should  be  noted  that  it  was  the  pioneer  in  the  cash  register 
business  and  developed  it.  It  owned  the  basic  patents  and 
must  have  acquired  in  a  proper  manner  a  very  great  number  of 
improvement  patents.  In  addition  to  this,  it  had  the  advantage 
of  very  great  capacity  in  the  management  of  its  affairs.  These 
two  considerations  together,  without  reference  to  any  unfair 
treatment  of  its  competitors,  are  sufficient  in  themselves  to 
account  in  a  large  measure  for  the  success  it  has  attained.  And 
it  is  not  unlikely  that  its  trade  was  pirated  by  other  competitors 
besides  the  American  of  Philadelphia  and  the  Boston,  against 
whom  it  obtained  decrees  of  infringement,  and  that  these,  as 
well  as  others,  in  their  competition  with  it,  resorted  to  some  of 
the  tactics  complained  of  here. 

We  think  it  clear,  also,  that  there  was  substantial  evidence 
to  the  effect  that  this  generic  conspiracy  was  directed  against 
the  American  of  Columbus  when  it  came  into  existence,  and 
became  specific  as  to  it,  and  that  it  continued  up  until  just 
shortly  before  the  beginning  of  the  three-year  period.  The  only 
other  competitors  then  in  existence  were  the  Peninsular,  Burdick- 
Corbin,  and  Dial,  neither  of  which,  as  stated,  was  of  much  con- 
sequence. That  company  was  the  successor  of  the  International, 
and  it  in  turn  of  the  Hallwood.  The  Hallwood  during  its 
existence,  which  covered  a  number  of  years,  was  one  of  the 
National's  most  stubborn  competitors.  It  went  into  the  hands 
of  a  receiver  in  1903  or  1904.  There  was  evidence  tending  to 
show  that  an  effort  was  made,  whilst  its  assets  were  in  such 
hands,  by  the  National,  to  acquire  them  without  its  being  known 
in  the  transaction.  The  International  acquired  them,  and  then 
the  American.  Its  connection  with  the  Hallwood  not  unHkely 
aided  it  in  getting  established  in  business  soon  after  entering 
the  field.  So  identified  with  the  Hallwood  was  it  that  its 
machines  were  frequently  called  Hallwood,  and  it,  sometimes, 
the  Hallwood  company.  In  view  of  its  connection  with  the 
Hallwood  company,  one  would  expect  the  generic  conspiracy 
to  be  directed  against  it  as  soon  as  it  came  into  existence,  and 


68o  TRUSTS,    POOLS   AND   CORPORATIONS 

so  the  government's  evidence  tended  to  show.  May  4,  1907, 
the  district  manager  at  Detroit,  Henry  F.  James,  wrote  to  the 
assistant  head  of  the  competition  department,  Joseph  E.  Warren, 
that  the  Hallwood  {i.e.  American)  situation  in  Detroit  looked 
rather  serious,  and  suggested  the  employment  of  the  plaintiff  in 
error  Alexander  W.  Sinclair,  then  off  the  roll,  to  hire  the  Hall- 
wood  agent  at  that  point.  Warren  answered  that  the  competi- 
tion did  not  warrant  placing  Sinclair  on  the  roll  again,  and 
suggested  that  he  (James)  was  in  a  better  position  to  hire  the 
agent  than  Sinclair.  There  was  no  evidence  of  anything  else 
of  a  specific  character  during  this  year.  But  there  were  general 
statements  as  to  competition  which  could  not  have  had  reference 
to  any  one  but  the  American.  Such  was  the  statement  of  plaintiff 
in  error  John  H.  Patterson,  at  the  convention  of  district  mana- 
gers July  22,  1907.  June  20,  1907,  the  general  manager,  Hugh 
Chalmers,  wrote  to  all  the  sales  agents  and  salesmen,  suggesting 
that  they  call  on  the  users  of  competing  machines  and  point  out 
to  them  the  weaknesses  and  deficiencies  thereof,  so  that,  even 
if  they  could  not  make  a  trade,  they  would  cease  to  be  a  "  plug- 
ger"  for  the  opposition.  And  September  6,  1907,  the  head  of 
the  competition  department,  C.  D.  Anderson,  wrote  James  at 
Detroit  that  the  company  was  never  in  better  shape  to  take 
care  of  competition  than  at  that  time,  and  for  that  reason  they 
did  not  intend  to  let  it  increase  again. 

March  i,  1908,  the  plaintiff  in  error  Sinclair  entered  the 
employ  of  the  American  and  located  at  Detroit.  It  is  possible 
that  he  was  then  still  off  the  National's  roll.  He  continued  in 
its  employ  there  until  September  24,  1908.  During  this  time  a 
vigorous  effort  was  made  to  drive  him  from  the  field,  and  it 
finally  succeeded,  when  he  reentered  the  National's  employ  as 
a  company  salesman,  and  so  continued  until  the  trial.  The 
plaintiffs  in  error  Pflum,  then  general  manager,  Harned,  then 
executive  secretary,  and  Watson,  then  sales  manager,  participated 
in  this  effort.  The  method  of  attack  was  to  prevent  him  from 
making  sales  of  American  machines  and  to  displace  such  as  he 
made.  The  way  in  which  the  former  was  attempted  was  by 
offering  Hallwoods  owned  by  the  National  at  low  prices  —  i.e. 
thirty  cents  on  the  dollar  —  in  competition.    The  intention  was  to 


NATIONAL   CASH    REGISTER  CASE  68 1 

construct  a  machine  specially  for  that  purpose,  ^n  a  letter 
from  James  to  Harned  of  date  March  i6,  1908,  he  stated  that 
he  needed  a  proper  tool  with  which  to  fight  Sinclair's  com})ctition, 
and  requested  that  ten  or  twelve  Hallwoods  be  sent  him,  "as 
our  machine  parallel  to  Hallwood  will  not  be  ready  for  some 
time,"  and  Harned  in  his  answer  said  that  work  on  drawer- 
operated  machine  —  which  was  the  character  of  the  American  — 
was  being  pushed  and  they  would  be  able  to  give  it  to  him 
sooner  than  he  had  stated.  But  whether  this  machine  was  used 
in  this  connection  does  not  appear.  The  way  in  which  the  dis- 
placements were  brought  about  was  by  offering  the  regular 
National  machines  on  unusual  terms.  Both  methods  were 
unfair.  Their  purpose  was  to  drive  Sinclair  and  the  American 
which  he  represented  off  the  field,  so  that  the  National  might 
have  it  to  itself.  May  16,  1908,  Harned  wrote  James,  congrat- 
ulating him  on  displacing  six  Hallwoods  taken  in  part  pay  for 
six  Nationals,  and  stated  that  all  at  the  factory,  including 
plaintiff  in  error  Deeds,  were  pleased  and  gratified  at  the  out- 
come, and  that  he  had  put  a  crimp  in  Sinclair  from  which  he 
would  have  difficulty  in  recovery.  June  9,  1908,  James  wrote 
Pflum  that  since  Sinclair  had  taken  hold  he  had  blocked  twenty-five 
of  his  sales  and  displaced  nine.  September  4,  1908,  plaintiff  in 
error  Watson  issued  a  circular  to  the  selling  force  empowering 
them  to  sell  Hallwoods  at  thirty  cents  on  the  dollar.  There  was 
evidence  of  unfair  means  being  used  during  this  same  time  at 
Los  Angeles  to  prevent  the  sale  of  the  American  machine,  the 
details  of  which  need  not  be  given.  And  September  10,  1908, 
James,  in  whose  territory  Grand  Rapids,  Mich.,  was  located, 
wrote  plaintiff  in  error  Watson,  wanting  to  know  the  conclusion 
of  himself  and  plaintiff  in  error  Pflum  as  to  the  situation  at  that 
place,  and  whether  they  had  succeeded  in  hiring  Cleaves,  the 
agent  of  the  American,  and  saying  that,  if  they  could  not  hire 
him,  they  should  have  some  special  men  —  i.e.  company  sales- 
men —  there  until  they  ran  him  out  of  business. 

After  Sinclair  returned  to  the  service  of  the  National,  he  was 
sent  to  Toledo,  Ohio,  where  he  remained  at  least  until  in 
November,  1908.  Whilst  there  he  adopted  the  same  tactics 
that  had   been   used   against   him    in    Detroit  to   drive   out   the 


682  TRUSTS,    POOLS   AND   CORPORATIONS 

agents  of  the  American  at  that  point.  Finally,  in  the  middle  of 
January,  1909,  James,  the  district  manager  at  Detroit,  left  the 
service  of  the  National,  and  in  breach  of  a  contract  that  he  had 
with  it  at  once  entered  the  employ  of  the  American  and  was 
placed  in  charge  of  several  states,  with  headquarters  at  Detroit. 
In  the  early  part  of  February,  1909,  certainly  not  as  late  as  the 
22d  of  that  month,  the  new  district  manager  appointed  to  take 
the  place  of  James  at  Detroit  was  installed.  At  a  meeting  of  the 
sales  agents  and  salesmen  who  were  to  be  under  him,  held  on 
that  occasion,  the  plaintiff  in  error  Watson  was  present  and 
undertook  to  outline  the  policy  of  the  National  in  meeting  com- 
petition, and  in  the  course  of  his  remarks,  according  to  one 
witness,  he  said  that  it  would  be  necessary  to  use  every  means 
possible  to  put  James  out  of  business,  and  according  to  another 
that  they  did  not  want  him  to  get  a  foothold  in  Detroit,  and  that 
they  would  move  their  executive  offices  to  Detroit,  but  that  they 
would  put  him  out  of  business. 

Thus  it  is  that  the  government's  evidence  tended  to  establish 
a  conspiracy  on  the  part  of  some  of  the  defendants  at  least 
against  the  American,  and  brought  it  down  almost  to  the  door 
of  the  three-year  period.  It  remains  to  consider  whether  there 
was  substantial  evidence  to  the  effect  that  it  entered  that  door. 
Possibly  in  view  of  the  fact  that  the  American  was  still  actively 
in  business  —  that  what  had  transpired  preceding  the  three  years 
down  almost  to  it  indicated  an  absolute  and  fixed  purpose  to  re- 
strain the  trade  of  the  American,  if  not  to  drive  it  out  of  busi- 
ness, without  any  indication  of  a  change  of  purpose  before  the 
three  years  —  and  that  the  American  was  represented  at  Detroit 
by  the  National's  former  representative,  against  whom  it  had  a 
grievance,  it  was  for  the  jury,  without  more,  to  determine 
whether  the  conspiracy  continued  into  the  three  years.  But  the 
case  does  not  depend  upon  presumptions.  Things  were  done 
within  the  three  years  by  representatives  of  the  National  in  re- 
straint of  the  American's  trade  and  commerce.  According  to 
the  defendants,  all  that  was  done  was  by  sales  agents  and  sales- 
men, and  none  of  the  plaintiffs  in  error  were  directly  connected 
with  it ;  and  what  was  done  by  sales  agents  and  salesmen  was 
scanty,  in  view  of  the  fact  that  the  National  had  seven  hundred 


NATIONAL  CASH    REGISTER   CASE  683 

fifty  of  such  representatives  distributed  throughout  ike  country, 
and  the  American  was  doing  business  all  over  it.  They  urge  that 
what  the  government's  evidence  established  was  done  should  be 
taken  as  being  all  that  was  done.  The  American  knew  of  all 
unfriendly  action  towards  it,  and  actively  assisted  it  in  the  prose- 
cution of  the  case,  and  the  evidence  disclosed  that  it  made  a 
very  thorough  investigation.  Here,  according  to  defendants,  was 
all  that  was  done.  In  twenty-two  instances  sales  agents  and 
salesmen  of  the  National  attempted  to  induce  purchasers  of 
American  machines,  who  had  not  paid  for  them,  to  repudiate 
their  contracts  by  seller's  talk  and  offering  to  allow  them  what 
they  had  paid  on  the  purchase  price  of  Nationals,  in  two,  and 
possibly  three,  of  which  instances  the  attempt  was  successful. 
They  occurred  in  fourteen  different  states  and  seventeen  differ- 
ent localities.  Ten  of  them  occurred  in  1909,  seven  in  1910, 
and  five  in  191 1.  Defendants  would  have  it  that  these  were  all 
such  instances,  but  the  tendency  of  the  testimony  of  Steuben- 
rauch  is  to  establish  eight  others,  six  of  which  were  in  19 10  and 
two  in  191 2,  in  Connecticut.  In  addition  to  these  the  acts  in 
restraint  covered  by  the  government's  evidence  were  the  display 
in  March,  1909,  by  the  National's  sales  agents  at  Los  Angeles, 
in  California,  in  his  show  window,  smashed-up  Hallwood  cash 
registers  with  a  card  bearing  this  inscription  : 

Hundreds  of  merchants  have  exchanged  unsatisfactory  Hallwood 
cash  registers  for  Nationals.  We  sell  them  at  30  cents  on  the  dol- 
lar. But  as  they  have  no  commercial  value  and  do  not  sell,  we  are 
compelled  to  break  them  up  to  make  room  and  will  sell  as  Old  Junk. 

—  an  unsuccessful  attempt  by  the  sales  agent  of  the  National 
at  Dallas,  Tex.,  in  the  winter  of  1909-1910  to  bribe  a  drayman 
in  the  employ  of  the  American  agent  to  tell  him  where  he  de- 
livered every  American  machine,  and  an  unsuccessful  attempt 
by  the  sales  agent  of  the  National  at  Los  Angeles,  Cal,  May  i, 
1910,  to  induce  the  American  agent  at  that  point  to  leave  its 
employ  and  enter  that  of  the  National.  The  defendants  con- 
tend that  it  is  more  reasonable  to  account  for  these  acts  by  a 
desire  on  the  part  of  the  sales  agents  and  salesmen  to  make 
commissions  than  the  existence  of  the  conspiracy  charged.     Un- 


684  TRUSTS,    POOLS  AND  CORPORATIONS 

doubtedly  these  acts  are  small  in  number  compared  with  the 
number  which  might  have  been,  and  it  is  possible  to  account  for 
them  on  the  grounds  suggested.  And  the  fact  that  James,  the 
most  important  witness  for  the  government,  did  not  definitely 
testify  to  any  specific  acts  in  restraint  of  his  trade  after  he  be- 
came connected  with  the  American  is  favorable  to  the  defend- 
ant's position.  But  even  on  the  basis  that  the  foregoing  list  ex- 
hausts all  acts  in  restraint  of  the  trade  and  commerce  of  the 
American  within  the  three  years,  and  that  these  are  to  be  ac- 
counted for,  as  defendants  would  have  it,  or  as  mere  sequelcE  of 
a  conspiracy  that  terminated  before  the  beginning  of  the  three 
years,  still  we  are  constrained  to  hold  that  it  was  for  the  jury  to 
determine  whether  the  conspiracy  continued  into  the  three  years. 
We  have  shown  that  the  government's  evidence  tends  to  estab- 
lish the  continuance  of  the  conspiracy  almost  up  to  the  very  be- 
ginning of  the  three  years.  Something  happened  shortly  after 
the  beginning  of  the  three  years  calculated  to  terminate  the  con- 
spiracy, which  may  account  for  nothing  being  done  by  the  de- 
fendants in  error  within  the  three  years  indicating  the  continued 
existence  of  the  conspiracy,  and  which,  if  it  was  the  cause  of  its 
termination,  involves  its  continuance  into  the  three  years.  That 
was  action  on  the  part  of  James  to  call  the  National  to  account 
for  its  attitude  towards  and  action  against  the  American.  On 
July  14,  1909,  an  information  in  the  nature  of  a  quo  warranto  on 
behalf  of  the  people  on  relation  of  James  was  filed  in  the  Su- 
preme Court  of  Michigan  against  the  National  company  to  oust 
it  from  that  state  for  violating  its  anti-trust  laws,  which  proceed- 
ing resulted  in  a  judgment  for  a  fine  on  July  14,  1914.  In  the 
nature  of  things,  some  time  must  have  been  taken  to  prepare 
for  the  proceeding,  and  the  evidence  disclosed  that  James  caused 
affidavits  to  be  taken  of  unfair  acts  toward  the  American  by 
National  agents  as  far  back  as  in  March,  1909.  It  is  not  un- 
likely that  the  National  became  aware  of  this  contemplated  pro- 
ceeding, and  knowledge  of  it  was  calculated  to  cause  it  to  take 
steps  to  end  all  action  against  the  American  which  could  reason- 
ably be  complained  of.  And  we  find  that  on  April  i,  1909,  the 
plaintiff  in  error  Pflum  sent  the  following  letter  to  all  the  dis- 
trict managers,  to  wit : 


NATIONAT.   CASH    REGISTER   CASE  685 

The  National  Cash  Register  CompajjV* 

New  York,  April,  1909 
To  All  District  Managers  : 

Mr.  M.  N.  Jacobs:  In  the  various  conventions  I  have  attended,  I 
found  that  some  of  the  newer  members  in  the  districts  are  not 
thoroughly  clear  on  the  best  way  to  handle  sales  made  by  other  com- 
panies. Please  see  that  every  agent  in  your  district  thoroughly  under- 
stands our  position  in  the  matter. 

You  know  what  this  policy  is,  but  in  brief  will  say  that  in  no  case 
will  we  permit  any  of  our  agents  to  misrepresent  cash  registers  manu- 
factured by  other  companies,  neither  will  we  permit  any  agent  or  per- 
son in  our  employ  to  induce  any  purchaser  of  a  cash  register  made 
by  any  other  company  to  break  his  contract  and  return  the  register  to 
the  manufacturer.  With  the  line  of  registers  that  our  agents  now  have, 
they  are  able  to  show  the  superiority  of  Nationals  over  those  of  any 
other  make  and  at  lower  prices. 

There  has  been  no  violation  of  our  policies  that  I  know  of,  but  I 
give  you  this  information  because  of  the  inquiries  received  from  the 
newer  men  in  the  field. 

Please  see  that  these  instructions  are  carried  out  in  every  detail  and 
that  the  new  men  are  so  instructed  on  entering  the  field. 

Yours  very  truly,  Wm.    Pflum, 

W.  P.  —  T.  Vice  President  and  Manager 

There  is  room  to  claim  that  such  is  the  only  reasonable  ground 
to  account  for  this  letter  being  written  and  sent  out.  If  so, 
there  is  room  to  claim,  further,  that  the  conspiracy  continued  at 
least  until  then. 

But  we  would  not  be  understood  as  holding  that,  apart  from 
this  construction,  the  acts  in  restraint  of  the  American's  trade 
within  the  three  years  above  given  were  not  sufficient,  in  con- 
nection with  the  evidence  tending  to  trace  the  existence  of  the 
conspiracy  up  to  the  beginning  of  the  three  years,  to  require 
that  the  question  as  to  its  continuance  within  the  three  years  be 
submitted  to  the  jury.  The  question  is  not  whether  those  acts 
were  sufficient  to  establish  the  entering  into  a  conspiracy  in  the 
first  instance,  but  the  continuance  of  a  conspiracy  theretofore 
formed.  And  that  list  cannot  be  said  to  be  exhaustive.  We 
have  heretofore  noted  that  James  in  his  letter  to  Harned  of 
March  16,  1908,  and  Harned  in  his  answer,  referred  to  a  drawer- 


686  TRUSTS,    POOLS   AND    CORPORATIONS 

operated  machine  parallel  to  the  Hallwood  {i.e.  American), 
which  the  National  was  making  for  the  purpose  of  fighting  the 
American  therewith.  The  government's  evidence  tended  to 
show  that  a  machine  known  as  looo-line  machine,  and  which 
not  unlikely  was  this  machine,  was  used  only  for  the  purpose  of 
fighting  the  American  and  keeping  it  from  making  sales  within 
the  three  years.  If  so,  this  could  hardly  be  without  some  of 
the  defendants  being  connected  with  it.  The  government's 
position  here  was  combated  strongly  by  the  defendants,  but  we 
cannot  weigh  its  evidence  on  this  point  as  against  that  of  the 
government.  For  these  reasons,  therefore,  we  think  the  case 
was  for  the  jury,  and  the  court  did  not  err  in  overruling  all  the 
motions.  It  is  not  the  province  of  an  appellate  court  to  weigh 
the  evidence.  What  the  trial  court  might  do  on  a  motion  for 
new  trial  as  to  some  of  the  defendants,  in  the  view  which  we 
have  taken  of  the  nature  of  the  offense  charged,  we  need  not 
pause  to  consider. 

It  is  now  in  order  to  take  up  the  assignments  questioning 
rulings  upon  the  admissibility  of  evidence.  They  are  very  nu- 
merous, but  the  consideration  of  them  can  be  shortened  by 
classification.  In  considering  them,  the  case  for  the  jury,  as  we 
have  determined  it  to  have  been,  should  be  kept  constantly  in 
mind.  That  case  is  whether  within  the  three  years  the  defend- 
ants conspired  in  restraint  of  the  trade  of  the  American  of 
Columbus,  by  the  use  of  the  fifth  and  ninth  means.  No  evi- 
dence that  was  not  relevant  thereto  was  admissible,  and  all 
that  was  was  admissible,  if  not  otherwise  objectionable.  The 
primary  classification  of  these  rulings  is  into  those  involving 
evidence  that  was  admitted  and  those  where  the  evidence  was 
excluded.  We  consider  first  those  where  the  evidence  was  ad- 
mitted. In  this  connection  it  may  be  said  generally  that  the 
admissible  evidence  was  not  confined  to  that  which  bore  directly 
upon  the  existence  of  such  conspiracy  within  the  three  years. 
All  that  was  not  otherwise  objectionable  tending  to  show  the 
existence  of  a  generic  conspiracy  when  that  company  came  into 
existence  and  its  fixed  and  absolute  character  was  relevant  and 
admissible.  Likewise  as  to  all  evidence  tending  to  show  that 
upon    its    coming   into    existence    the    generic    conspiracy  was 


NATIONAL   CASH    REGISTER    CASE  687 

directed  against  it  specifically  and  continued  down"*to  the  be- 
ginning of  the  three  years. 

The  admitted  evidence  involved  in  the  rulings  covered  by  the 
assignments  relates  to  transactions  within  the  three  years  and 
to  transactions  prior  thereto  as  far  back  as  the  beginning  of  the 
twenty  years.  Here  we  consider  first  that  which  relates  to 
transactions  within  the  three  years.  And  that  may  be  divided 
into  the  evidence  of  the  acts  in  restraint  of  the  American  trade, 
heretofore  referred  to,  evidence  of  an  act  against  that  company, 
not  heretofore  referred  to,  and  evidence  of  acts  against  the 
Michigan  and  Dial  companies. 

All  of  the  evidence  of  acts  against  the  American,  heretofore 
referred  to,  was  objected  to,  and  the  rulings  admitting  it  are  as- 
signed as  error.  It  is  urged  that  none  of  those  acts  come  within 
the  means  specified  in  the  indictment,  and  that  the  eleventh 
item  is  insufficient,  under  the  authority  of  the  case  of  United 
States  v.  Greene {D.  C),  1 15  Fed.  343,  346.  We  think,  however, 
that  they  fairly  come  within  the  fifth  and  ninth.  Greater  stress 
is  made  on  the  consideration  that  it  was  not  shown  that  any  of 
the  defendants  were  connected  with  any  of  those  acts.  It  is 
true  that  there  was  no  direct  evidence  of  such  connection,  apart 
from  the  use  of  the  1000-line  machines  ;  but  this  circumstance 
did  not  render  evidence  of  those  acts  inadmissible.  The  gov- 
ernment would  base  its  admissibility  on  the  doctrine  of  re- 
spondeat superior.  It  cites  the  cases  of  United  States  v. 
Gooding,  12  Wheat.  460,  6  L.  Ed.  693,  Cliquofs  Cliampagne, 
3  Wall.  114,  18  L.  Ed.  116,  and  Stockwell  v.  United  States, 
13  Wall.  531,  20  L.  Ed.  491,  where  it  was  held  that: 

Whatever  is  done  by  an  agent  in  reference  to  the  business  in 
which  he  is  at  the  time  employed  and  within  the  scope  of  this 
authority  is  said  or  done  by  the  principal,  and  may  be  proved  as 
well  in  a  criminal  as  in  a  civil  case  in  all  respects  as  if  the  principal 
were  the  actor. 

But  this  doctrine  can  have  no  application  here,  as  the  persons 
who  did  the  acts  —  i.e.  sales  agents  and  salesmen  —  were  not 
the  agents  of  the  defendants.  They  were  the  agents  of  the  Na- 
tional company.     They  were  under  defendants,  but  this  did  not 


688  TRUSTS,    POOLS   AND   CORPORATIONS 

make  them  defendants'  agents.  If  urges  further  that  they  were 
co-conspirators  with  defendants,  and  under  the  case  of  Chine  v. 
United  States,  159  U.  S.  590,  16  Sup.  Ct.  125,  40  L.  Ed.  269, 
what  one  conspirator  does  is  evidence  against  the  other,  even 
though  he  is  not  a  defendant  or  charged  with  being  a  party  to 
the  conspiracy  in  the  indictment.  Possibly  this  is  sufficient  to 
uphold  the  action  of  the  court  in  admitting  the  evidence.  But 
it  is  not  necessary  to  rely  on  it.  All  the  acts  were  done  in  the 
regular  course  of  the  business  of  the  National  company.  Those 
sales  agents  and  salesmen  were  under  the  direct  supervision  of 
some,  at  least,  of  the  defendants.  There  was  substantial  evi- 
dence that  prior  to  the  three  years  the  defendants  were  in  a  con- 
spiracy to  restrain  the  trade  and  commerce  of  the  American  of 
Columbus  by  causing  such  acts  to  be  done,  and  the  sole  question 
was  whether  that  conspiracy  had  continued  into  the  three  years. 
The  doing  of  those  acts  was  relevant  to  that  issue.  It  was  not 
an  unreasonable  inference  that  they  were  to  be  accounted  for 
by  the  continued  existence  of  the  conspiracy.  Possibly  they 
are  to  be  accounted  for  by  the  initiative  of  the  sales  agents  and 
salesmen  in  their  anxiety  to  make  commissions  or  as  mere 
seqnelcE.  But  it  was  for  the  jury  to  determine  how  they  were 
to  be  accounted  for  as  between  those  three  possible  ways  of 
doing  so.  The  defendants  contend  that  is  a  case  of  an  inference 
upon  or  from  an  inference,  and  that  this  is  not  allowable  under 
the  cases  of  United  States  v.  Ross,  92  U.  S.  281,  23  L.  Ed.  707, 
and  Manning  v.  Insjirance  Co.,  100  U.  S.  693,  25  L.  Ed.  761. 
That  it  is  a  case  of  an  inference  upon  or  from  an  inference  is 
attempted  to  be  made  out  by  tracing  the  course  of  inference  in 
this  way.  An  inference  is  first  drawn  that  the  sales  agents  and 
salesmen  acted  upon  the  instructions  of  the  National  company, 
and  then  the  further  inference  is  drawn  that  defendants  were 
connected  with  such  instructions.  This  case  does  not  involve 
any  such  question.  It  is  a  case  of  immediate  inference.  The 
course  of  inference  is  not  as  claimed,  but  from  the  acts  done  to 
the  conspiracy  as  the  cause  thereof.  The  court,  therefore,  did 
not  err  in  admitting  the  evidence. 

The  evidence  of  an  act  against  the  company  not  heretofore 
referred  to  was  as  to  something  that  happened  in  connection 


NATIONAL   CASH    REGISTER   CASE  68q 

with  one  of  the  attempts  on  the  part  of  the  Na^ienal's  sales 
agents  and  salesmen  to  induce  purchasers  of  American  machines 
to  repudiate  their  contracts  of  purchase,  to  wit,  the  attempt  as 
to  Conrad  Green  &  Sons  of  Portland,  Ore.,  in  the  latter  part 
of  19 1 o.  The  agent  of  the  American,  who  made  that  sale,  left 
its  employ  the  latter  part  of  March,  191 1,  and  entered  that  of 
the  National.  Evidence  was  admitted  that  after  the  delivery 
of  the  machine  it  was  noticed  to  be  out  of  order.  The  Ameri- 
can agent  made  repeated  attempts  to  fix  it,  but  it  remained  out 
of  order  until  he  quit  its  employ.  After  he  left,  his  successor, 
a  repairman,  who  with  the  agent  had  examined  the  machine 
before  its  delivery  and  found  it  to  be  in  perfect  condition,  exam- 
ined it  again  and  found  that  it  was  out  of  order  because  a  piece 
of  its  mechanism  was  bent.  The  government's  position  was 
that  the  American  agent  had  bent  it,  at  the  National's  instance. 
There  was  no  other  evidence  that  the  National  had  any  other 
connection  with  the  matter  than  that  the  American  agent  en- 
tered its  employ  four  or  five  months  afterwards  and  one  of  its 
competition  men  was  seen  in  his  store  about  three  weeks  before 
he  did  so.  We  do  not  think  the  evidence  was  sufficient  to  con- 
nect any  National  agent  with  the  defective  condition  of  the 
machine.  There  was  no  evidence  of  any  other  such  act  having 
ever  been  committed  or  attempted  against  the  American.  We, 
therefore,  hold  that  there  was  error  here.  • 

The  acts  against  the  Michigan  and  Dial,  evidence  of  which 
was  admitted,  were  these.  A  salesman  of  the  National  attempted 
to  induce  a  dealer  in  Michigan  cash  registers,  who  bought  them 
outright  from  the  Michigan  company  and  resold  them,  to  dis- 
continue the  business  by  threats  of  interference.  A  similar 
transaction  to  this  took  place  prior  to  the  three  years,  i.e.  in 
1908.  As  to  the  Dial  in  one  instance  an  agent  of  the  National 
happening  in  the  office  of  that  company  when  an  acquaintance 
was  there  negotiating  for  some  of  its  stock  advised  him  not  to 
buy  it ;  and  in  another  the  pjaintiff  in  error  Muzzy  attempted 
to  purchase  the  business  or  patents  of  the  company  which  was 
unsuccessful.  We  think  the  court  erred  in  admitting  this  evi- 
dence. The  government  does  not  contend  that  the  evidence  as 
to  the  Dial  was  sufficient  to  make  a  case  for  the  jury  of  conspir- 


690  TRUSTS,    POOLS   AND   CORPORATIONS 

acy  against  it  and  we  have  held  that  that  as  to  the  Michigan 
was  not  sufficient  for  that  purpose.  If  this  evidence  did  not 
tend  to  estabhsh  a  conspiracy  against  those  companies,  it  did 
not  tend  to  estabhsh  one  against  the  American. 

We  come  now  to  the  evidence  as  to  transactions  prior  to  the 
three  years  as  far  back  as  the  beginning  of  the  twenty  years 
which  was  admitted  over  defendants'  objection  and  the  ruHngs 
as  to  which  are  assigned  as  error.  The  bulk  of  the  evidence 
relates  to  such  transactions  and  most  of  it  was  objected  to.  If 
the  admission  of  any  of  the  evidence  as  to  acts  against  the 
American  prior  to  the  three  years  which,  we  have  theretofore 
stated,  is  assigned  as  error,  the  assignment  has  escaped  us.  The 
admission  of  the  evidence  as  to  the  other  act  against  the  Michi- 
gan is  assigned  as  error.  This  assignment  is  well  taken  for  the 
reason  given  as  to  the  act  within  the  three  years.  The  rest  of 
the  assignments  here  have  to  do  with  evidence  tending  to  show 
a  conspiracy  against  the  competitors  who  ceased  to  exist  prior 
to  1907  and  a  generic  conspiracy  which  was  directed  against 
them.  The  same  objections  are  made  to  some  of  this  evidence 
which  were  made  to  the  evidence  of  the  acts  against  the  Ameri- 
can within  the  three  years  heretofore  set  forth.  It  is  urged  that 
the  transactions  to  which  it  relates  do  not  come  within  the  means 
specified  and  the  eleventh  item  is  not  sufficient  to  warrant  evi- 
dence of  the^  under  the  Greene  case.  And  the  defendants 
were  not  shown  to  be  connected  with  or  responsible  for  them. 
It  is  also  urged  as  to  the  evidence  relating  to  transactions  and 
matters  occurring  in  the  early  part  of  the  twenty  years  that  they 
were  too  remote.  We  think,  however,  that  none  of  it  was  too 
remote.  It  as  well  as  the  evidence  of  later  transactions  and 
matters  tended  to  show  a  generic  conspiracy  and  bore  on  its  fixed 
and  absolute  character  and  on  its  nature  otherwise.  As  to  de- 
fendants' connection  therewith  they  all  occurred  in  the  regular 
course  of  the  business  of  the  National  and  whether  any  of  the 
defendants  and  which  of  them  \yere  connected  therewith  was 
open  to  inference  to  be  drawn  by  the  jury. 

Nor  do  we  think  the  objection  to  certain  of  this  evidence  that 
it  did  not  relate  to  transactions  coming  within  the  means  speci- 
fied well  taken.     The  ruling  of  the  court  in  refusing  to  require 


NATIONAL   CASH    REGISTER   CASE  691 

a  bill  of  particulars  of  the  means  intended  to  be  co'vered  cannot 
be  questioned  here  and  the  indictment  was  quite  liberal  in  the 
matter  of  specification.  Besides  the  case  for  which  the  defend- 
ants were  subject  to  conviction  was  limited  to  means  specified, 
to  wit,  fifth  and  ninth.  The  question  here  is  whether  in  estab- 
lishing the  generic  conspiracy  —  a  fact  relevant  to  the  existence 
of  the  specific  conspiracy  covered  by  that  case  —  the  government 
was  limited  to  the  means  specified  as  to  competitors  who  ceased 
their  existence  prior  to  1907.  The  tendency  of  the  use  of  other 
means  than  those  specified  was  to  establish  that  the  generic  con- 
spiracy was  to  use  every  possible  wrongful  means  that  might  be 
effective  in  putting  an  end  to  competition. 

Special  emphasis  is  made  upon  the  assignments  which  call  in 
question  rulings  admitting  evidence  concerning  the  purchase  of 
the  businesses  of  sixteen  competitors  by  the  National  prior  to  1907, 
and  how  the  purchases  came  about.  But  all  this  evidence  was 
admissible.  Its  tendency  was  to  establish  a  generic  conspiracy 
to  compel  competitors  to  sell  out  to  the  National  by  the  use  of 
any  effective  wrongful  means  in  existence  when  the  American 
came  in  the  field,  and  the  tendency  of  such  generic  conspiracy 
is  to  establish  a  specific  conspiracy  against  the  American  when 
it  came  into  existence,  which  continued  into  the  three  years,  at  least 
to  restrain  its  trade  and  commerce,  if  not  to  compel  it  to  sell  out 
to  the  National,  by  the  use  of  the  fifth  and  ninth  items.  It  is 
true  that,  at  the  time  of  these  purchases,  suits  for  infringement 
were  pending  against  most,  if  not  all,  of  these  competitors.  If 
such  suits  were  brought  in  good  faith  and  were  the  cause  of  the 
competitors  selHng  out,  then  the  tendency  of  that  evidence  was 
not  to  establish  such  a  generic  conspiracy.  The  case  of  Virtue 
V.  Creamery  Packing  Company,  227  U.  S.  8,  33  Sup.  Ct.  202, 
57  L.  Ed.  393,  was  an  action  for  treble  damages  under  the  seventh 
section  of  the  Anti-Trust  Act  for  a  conspiracy  in  restraint  of  the 
plaintiff's  interstate  trade  by  prosecuting  suits  against  them  for 
infringement  of  patents  and  circulating  reports  that  his  articles 
were  an  infringement  thereof.  Two  suits  for  infringement  had 
been  brought,  in  one  of  which  infringement  was  denied  and  in 
the  other  decreed.  In  connection  with  those  suits  such  reports 
were  circulated.     It  was  held  that  no  recovery  could  be  had. 


692  TRUSTS,   POOLS  AND   CORPORATIONS 

Mr.  Justice  McKenna  said  : 

Patents  would  be  of  little  value  if  infringers  of  them  could  not  be 
notified  of  the  consequences  of  infringement  or  proceeded  against  in 
the  courts.  Such  action  considered  by  itself  cannot  be  said  to  be  illegal. 
Patent  rights,  it  is  true,  may  be  asserted  in  malicious  prosecutions  as 
other  rights  .  .  .  may  be.  But  this  is  not  an  action  for  malicious 
prosecution.  It  is  an  action  under  the  Sherman  Anti-Trust  Act  for 
the  violations  ...  of  that  act,  seeking  treble  damages. 

He  did  not  mean  by  that  that  no  recovery  could  be  had  under 
that  act  for  damages  caused  by  a  conspiracy  in  restraint  of  inter- 
state trade  by  the  malicious  prosecution  of  suits  for  infringement. 
He  meant  no  more  than  that  it  did  not  appear  that  there  was 
any  such  conspiracy  in  that  case.  So  far  as  appeared,  both  suits 
were  brought  in  good  faith. 

But  here  there  was  evidence  tending  to  show  that  suits  were 
not  brought  in  good  faith,  and,  on  the  contrary,  were  an  "illicit 
use  of  the  courts  as  instrumentalities  of  oppression,"  condemned 
in  the  case  of  Commercial  Acetylene  Co.  v.  Avery  Portable  LigJit 
Co.  (C.  C.)  152  Fed.  642.     Besides,  there  was  evidence  tending 
to  show  in  certain  of  the  cases,  at  least,  that  the  bringing  of  the 
suit  was  not  the  real  cause  of  the  competitors  selling  out,  but 
the  use  of  other  wrongful  means.     In  addition  to  this,  in  each 
case  of  purchase  it  was  made  a  provision  in  the  contract  that  the 
competitor  should  not  engage  in  the  cash  register  business  for 
twenty  or  twenty-five  years,  except  one  or  two  states  in  the  West, 
where  the  cash  register  business  was  not  large,  which  evidenced 
the  purpose  to  keep  competitors  out  of  the  business.     This  cir- 
cumstance made  what  is  known  as  the  Leland  contract,  settling 
litigation  growing  out  of  the  suit  against  the  Boston  company,  in 
which  the  National  was  successful,  admissible  in  evidence.     After 
the  end  of  that  suit  the  National  brought  suits  against  certain 
officers  of   the    Boston   to  recover    damages.     In  the  case  of 
National  Cash  Register  Co.  v.  Leland,  94  Fed.  502,  37  C.  C.  A. 
372,  it  was  held  that  it  was  entitled  to  recover,  and  this  is  the 
litigation  in  settlement  of  which  the  contract  referred  to  was  ex- 
ecuted.    By  it  the  National  acquired  patents,  models,  and  certain 
apparatus  of  the  Boston  company.     It  contained  a  provision  by 


NATIONAL    CASH   REGISTER   CASE  693 

which  the  officers  were  not  to  engage  in  the  casli  pegister  busi- 
ness for  twenty-five  years,  except  in  Montana  and  Idaho.  There 
was  no  error  in  admitting  any  of  these  contracts  in  evidence. 

The  admission  of  contracts  with  others  than  the  competitors 
named  in  the  indictment,  eliminating  them  from  the  cash  register 
field,  is  also  assigned  as  error.  There  were  five  or  six  instances 
of  this  kind.  The  parties  with  whom  the  contracts  were  made 
were  mainly  dealers  in  second-hand  registers.  They  evidence  a 
purpose  to  acquire  complete  control  of  the  business  in  second- 
hand registers  of  its  make,  and  were  admissible  as  tending  to 
show  a  generic  conspiracy  and  its  character,  notwithstanding 
they  were  not  referred  to  in  the  indictment. 

The  ground  of  objection  to  the  evidence  thus  far  considered 
is  at  bottom  want  of  relevancy.  Except  to  the  extent  stated  we 
have  found  it  to  be  relevant.  In  addition  to  these  portions  of 
the  evidence,  the  admission  of  certain  other  evidence  is  assigned 
as  error  on  the  ground  of  its  being  hearsay.  It  is  evidence  as  to 
what  took  place  at  two  conventions  of  district  managers  held  at 
Dayton,  one  in  December,  1902,  and  the  other  in  July,  1907. 
We  have  made  use  of  what  was  said  by  the  defendant  John  H. 
Patterson  at  the  last  of  the  two.  What  took  place  at  these  con- 
ventions was  evidenced  by  what  purported  to  be  minutes  thereof. 
Those  of  the  first  convention  were  identified  by  a  witness  who 
had  been  assistant  to  the  head  of  the  competition  department 
and  was  present  at  it.  He  further  testified  that  the  minutes 
were  taken  by  stenographers,  amongst  whom  was  the  plaintiff 
in  error  Harnad,  who  took  most  of  them,  and  that  he  thought  a 
copy  was  sent  to  each  district  manager,  and  several  were  kept 
in  the  competition  department.  Those  of  the  last  one  were 
identified  by  the  former  district  manager  at  Detroit.  He  testified 
that  they  were  sent  to  him  by  the  National  company  with  his 
name  on  it.  It  is  not  clear  whether  he  is  to  be  understood  as 
testifying  that  he  was  present  at  the  convention.  Two  objections 
are  made  to  that  evidence.  One  is  that  both  were  copies,  and 
the  originals  should  have  been  produced  or  accounted  for.  The 
other  is  that  the  evidence  of  what  took  place  at  those  conventions 
was  hearsay.  The  first  objection  was  not  made  in  the  lower 
court.     That  raised  by  the  other  was  that  before  the  minutes 


694  TRUSTS,    POOLS  AND   CORPORATIONS 

were  read  in  evidence  their  accuracy  should  have  been  guaran- 
teed, either  by  the  persons  who  made  them  or  by  others  who 
were  present  at  the  conventions.  Strictly  speaking,  the  objec- 
tion that  the  evidence  was  hearsay  raised  this  question.  But 
the  objection  should  have  been  more  specific.  It  should  have 
been  expressly  urged  that  such  guaranty  should  be  made  be- 
fore admitting  the  minutes  in  evidence.  It  might  have  been 
furnished.  Because  of  this,  if  any  error  was  committed  in  ad- 
mitting these  minutes  in  evidence,  it  cannot  be  considered. 

This  brings  us  to  the  assignments  questioning  rulings  exclud- 
ing evidence  offered  by  the  defendants.  That  mainly  com- 
plained of  is  the  rejection  of  evidence  offered  to  prove  that  the 
National  owned  unexpired  patents  covering  the  machines  made 
and  sold  or  offered  to  be  sold,  by  the  sixteen  competitors  whom  it 
bought  out,  by  the  Hallwood,  International,  and  Hubinger  & 
Carroll,  which  quit  business,  and  by  the  American  of  Columbus, 
during  the  times  they  were  in  existence,  which  machines,  there- 
fore, infringed  those  patents.  According  to  this  offer,  all  the 
competitors  who  ceased  business  prior  to  1907,  and  the  American 
of  Columbus,  against  whose  trade  and  commerce  defendants  are 
charged  with  conspiring,  were  infringers  of  the  National's 
patents,  and  in  so  conspiring  they  were  but  seeking  to  prevent 
them  from  doing  that  which  the  National  had  a  right  to  have 
them  refrain  from  doing.  We  are  not  much  impressed  with  the 
good  faith  of  the  offer  as  to  the  American.  The  conduct  of  the 
National  and  its  managing  officers  during  the  five  years  of  its 
existence  preceding  the  indictment  seems  to  belie  it.  During 
that  time  no  suit  for  infringement  was  brought  against  that  com- 
pany, except  the  one  heretofore  referred  to,  and  there  is  no  in- 
dication that  they  then  thought  that  it  was  Hable  to  such  suit. 
It  is  not  likely  that  they  would  have  remained  quiescent  in  this 
regard,  if  they  so  thought.  Because  of  the  absence  of  any  evi- 
dence to  this  effect,  we  have  held  that  the  conspiracy  as  to  that 
company,  if  there  was  one,  did  not  include  the  sixth  and  seventh 
means.  But,  assuming  that  the  offer  was  made  in  good  faith, 
we  think  the  court  was  right  in  excluding  the  evidence.  It 
could  not  have  been  admissible  to  meet  a  charge  that  it  had  in 
bad  faith  threatened  to  brins:  suits  for  infrinsrement.     There  was 


NATIONAL  CASH   REGISTER   CASE  695 

no  such  charge  to  meet.  The  only  possible  grourrtl^or  its  ad- 
missibihty  was  to  make  good  that  defendants  had  the  right  to 
conspire  in  restraint  of  the  interstate  trade  and  commerce  in 
cash  registers  of  the  American  by  the  use  of  the  fifth  and  ninth 
means,  and  hence  were  not  guilty  of  an  offense  under  first  sec- 
tion of  the  Anti-Trust  Act  in  so  doing. 

This  brings  before  us  the  question  whether  a  patentee  and 
another,  or  the  officers  and  agents  of  a  patentee,  can  conspire  in 
restraint  of  the  interstate  trade  or  commerce  in  the  article  covered 
by  the  patent  of  persons  who  have  no  right  to  engage  in  such  trade 
and  commerce,  and  who  by  engaging  therein  infringe  the  right 
of  the  patentee;  i.e.  whether  such  a  conspiracy  comes  within 
that  section.  Its  disposition  involves  the  rights  of  a  patentee. 
These  rights  are  two,  one  statutory,  and  the  other  at  common 
law.  The  statutory  right  is  usually  stated  in  its  adjective  form  ; 
i.e.  to  exclude  or  to  prevent  others  from  making,  using,  or  sell- 
ing the  article  covered  by  the  patent,  or,  in  other  words,  to  sue 
or  to  bring  actions  against  others  who  are  or  have  been  making, 
using,  or  selling  them.  But  this  right  has  also  a  substantive 
form.  It  is  that  others  shall  refrain  from  making,  or  using,  or 
selling  the  article.  The  patentee's  right  at  common  law  is  to 
make,  use,  or  sell  the  article.  This  right  is  to  no  extent  depend- 
ent on  the  statute.  The  patentee,  therefore,  has  the  right  to  have 
others  refrain  from  selling  the  article  covered  by  his  patent,  and 
if  they  will  not  do  so  he  has  the  right  to  prevent  them  from  sell- 
ing by  suit.  Has  a  patentee,  then,  the  right  to  prevent  any  in- 
fringer from  selling  the  article  covered  by  his  patent  in  any  other 
way  ?  He  certainly  has  no  right  to  do  it  by  killing  him,  or  de- 
stroying his  factory,  or  such  infringing  articles  as  he  may  own. 
In  selling  the  infringing  article,  no  assaults  are  made  upon  his 
person,  so  that  there  is  no  room  for  claiming  that  his  action  was 
in  self-defense.  And  the  infringer  owns  his  factory  and  articles. 
The  patentee  may  be  entitled  to  a  destruction  of  the  infringing 
articles  through  the  process  of  the  court,  but  not  otherwise. 
But  has  he  the  right  to  prevent  him  from  so  doing  by  action 
outside  of  the  courts,  not  involving  an  invasion  of  the  rights  of 
person  or  property  of  the  infringer;  i.e.  by  the  use  of  means 
which  would  be  wrongful  if  used  by  him  to  prevent  another  from 


696  TRUSTS,    POOLS   AND    CORPORATIONS 

selling  articles  not  covered  by  his  patent  —  i.e.  such  means  as 
are  charged  here. 

We  are  not  concerned  here  with  the  question  as  to  what  a 
patentee  may  himself  do  in  a  general  way  to  protect  the  sub- 
stantive right  which  he  has  from  invasion.  The  question  in 
hand  is  whether  he  and  another,  or  his  officers  and  agents  in  his 
interest,  may  conspire  to  prevent  an  invasion  of  his  rights  in  the 
interstate  field  by  the  use  of  any  such  means.  This  depends 
solely  on  whether  such  a  conspiracy  is  within  the  first  section  of 
the  Anti-Trust  Act.  And  it  would  seem  that  to  ask  this  ques- 
tion is  to  answer  it.  The  terms  of  the  section  are  of  a  most 
sweeping  character.  It  includes  every  conspiracy  in  restraint 
of  interstate  trade  or  commerce.  It  is  not  a  question  whether 
it  is  rightful  or  wrongful  interstate  trade  or  commerce  that  is 
covered  by  the  conspiracy.  It  is  sufficient  that  it  is  interstate 
trade  or  commerce.  If  two  or  more  persons  in  no  way  interested 
in  a  patent  were  to  conspire  in  restraint  of  the  interstate  trade 
or  commerce  of  an  infringer,  no  one  would  contend  that  the  con- 
spiracy was  not  covered  by  the  statute.  No  more  is  it  open  to 
contend  that  a  conspiracy  by  a  patentee  and  another,  or  by  the 
officers  and  agents  of  a  patentee  in  his  interest,  to  restrain  the 
interstate  trade  or  commerce  of  an  infringer,  is  not  within 
the  statute.  The  intent  of  the  statute  was  to  sweep  away  all 
conspiracies  in  restraint  of  such  trade  or  commerce,  whatever 
their  character  may  be.  The  statute  respects  the  monopoly  of 
the  patentee.  It  to  no  extent  invades  the  rights  conferred  upon 
him  by  his  patent.  Bementv.  National Harrozv  Co.,  186  U.  S.  70, 
22  Sup.  Ct.  747,  46  L.  Ed.  1058 ;  United  States  v.  Winsloiv, 
227  U.  S.  202,  33  Sup.  Ct.  253,  57  L.  Ed.  481.  But  the  right  to 
conspire  with  another  or  others  in  his  interest  in  restraint  of  the 
interstate  trade  or  commerce  covered  by  his  patent  is  not  one  of 
the  rights  conferred  thereby,  and  such  a  conspiracy  is  within 
the  statute.  Standard  Sanitary  Mfg.  Co.  v.  United  States. 
[Decision  reprinted  at  p.  606,  sjipra.'\  Mr.  Justice  McKenna 
there  said : 

Rights  conferred  by  patents  are  indeed  very  definite  and  extensive, 
but  they  do  not  give  any  more  than  other  rights  a  universal  license 
against  positive  prohibitions.      The  Sherman  Law  is  a  limitation  of 


NATIONAL   CASH    REGISTER   CASE  697 

rights  —  rights  which  may  be  pushed  to  evil  consequence*ra-nd  there- 
fore restrained. 

We  are  therefore  clearly  of  the  opinion  that  the  defendants 
were  not  entitled  to  offer  evidence  that  the  trade  and  commerce 
of  the  American  of  Columbus  in  cash  registers  was  covered  by 
an  unexpired  patent  owned  by  the  National. 

How,  then,  as  to  the  competitors  who  ceased  to  exist  prior  to 
1907,  and  who  either  sold  out  to  the  National  or  just  quit  doing 
business?  Was  evidence  that  their  trade  and  commerce  was 
covered  by  unexpired  patents  so  owned  admissible  ?  We  think 
it  was.  As  to  them  the  question  before  the  jury  was  not  whether 
the  defendants  had  the  right  to  conspire  in  restraint  of  their 
interstate  trade  or  commerce.  The  defendants  were  not  on  trial 
for  any  such  conspiracy.  The  right  to  prosecute  them  for  such 
conspiracy  had  been  long  before  barred  by  the  statute  of  limita- 
tions. But  the  question  was  before  the  jury  whether  they  had 
conspired  against  those  competitors  to  restrain  their  interstate 
trade  or  commerce  by  threatening  to  bring  and  bringing  in  bad 
faith  suits  against  them  for  infringement  of  patents  to  compel 
them  to  sell  out  to  the  National  or  quit  the  business.  It  was 
the  position  of  the  government  that  they  had  so  conspired,  and 
there  was  evidence  tending  to  establish  that  they  had,  at  least 
as  to  some  of  them.  This  was  not  an  ultimate  question  in  the 
case.  It  was  only  a  subordinate  one,  and  yet  it  was  a  real  one. 
It  was  not  primarily  subordinate  to  the  question  whether  the 
defendants  had  conspired  in  restraint  of  the  interstate  trade  or 
commerce  of  the  American  of  Columbus  by  the  use  of  such 
means.  As  we  have  seen,  there  was  no  such  question  in  the 
case.  It  was  primarily  subordinate  to  the  question  whether, 
prior  to  1907,  when  the  American  came  into  existence,  the  de- 
fendants were  parties  to  a  generic  conspiracy  in  restraint  of  the 
interstate  trade  or  commerce  of  all  competitors  who  might  en- 
danger the  supremacy  of  the  National  by  the  use  of  any  effective 
means,  of  which  a  conspiracy  against  the  American  of  Columbus 
by  the  use  of  the  fifth  and  ninth  means,  which  continued  into 
the  three  years,  was  the  outgrowth. 

Now,  as  bearing  on  that  question,  we  think  that  the  defend- 
ants were  entitled  to  prove,  if  they  could,  that  the  machines  of 


698  TRUSTS,    POOLS   AND   CORPORATIONS 

those  competitors  were  infringements.  The  means  covered  by 
the  seventh  item  were  in  effect  malicious  prosecutions  against 
those  competitors — the  bringing  of  suits  for  infringement,  not 
in  the  belief  that  the  National  had  a  good  caiise  of  action  against 
them,  but  without  regard  to  whether  it  had  or  not  —  in  order  to 
drive  them  from  the  cash  register  field ;  i.e.  in  bad  faith  or 
without  probable  cause.  A  suit  for  malicious  prosecution  cannot 
be  brought  until  the  termination  of  the  prosecution.  In  such  a 
suit,  therefore,  it  is  never  a  question  whether  there  was  real 
cause  for  the  prosecution.  Its  dismissal  settles  the  question 
whether  there  was  real  cause.  But  it  is  a  question  therein 
whether  there  was  probable  cause.  The  suit  cannot  be  main- 
tained if  there  was.  But  here  there  was  no  termination  of  the 
suits  for  infringement,  by  a  decision  of  the  question  of  infringe- 
ment involved  therein.  In  most  instances  the  suits  were  ter- 
minated by  settlement.  The  question,  therefore,  whether  there 
was  real  cause  for  bringing  them,  is  still  an  open  question. 
And  if  there  was  real  cause  for  their  bringing,  they  were  not 
malicious  prosecutions  —  they  were  not  brought  in  bad  faith. 
If  in  an  ordinary  suit  for  malicious  prosecution  it  is  a  good 
defense  that  there  was  probable  cause  for  the  prosecution,  so 
here  the  claim  that  these  infringement  suits  were  brought  in 
bad  faith  is  met  by  showing  that  there  was  real  cause  for  them, 
in  that  the  competitors  were  infringers  of  valid  unexpired 
patents  held  by  the  National.  The  defendants  were  not  hmited 
to  showing  that  the  National  acted  on  the  advice  of  counsel  in 
bringing  the  suits.  They  had  the  right  to  show,  if  they  could, 
that  such  suits  were  based  upon  valid  patents  against  real  in- 
fringers. It  is  true  that  the  effect  of  this  is  to  bring  into  this 
prosecution  a  considerable  number  of  patent  suits  as  it  were. 
But  the  government  has  brought  them  here  by  charging  in  the 
indictment  that  defendants  conspired  to  drive  these  competitors 
from  the  cash  register  field  by  maliciously  bringing  suits  for  in- 
fringements of  patents  against  them,  and  introducing  evidence 
to  that  effect.  We  think,  therefore,  that  the  evidence  was 
admissible,  and  that  there  was  error  in  excluding  it. 

It  is  also  urged  that  the  court  erred  in  excluding  evidence  of 
competitive  tactics  and  aggressions  on  the  part  of  the  National's 


NATIONAL   CASH    REGISTER   CASE  699 

competitors,  offered  by  defendants.  As  we  makc^t^  this  evi- 
dence related  only  to  the  Hallwood,  the  American's  predecessor, 
and  to  Steubenrauch,  the  American's  Connecticut  sales  agent; 
the  conduct  of  the  latter  happening  within  the  three  years.  We 
think  this  evidence  was  admissible.  The  relevancy  of  the  gov- 
ernment's evidence  as  to  a  conspiracy  against  the  Hallwood  was 
in  its  bearing  on  the  existence  of  a  generic  conspiracy  and  its 
character.  The  tendency  of  the  evidence  as  to  its  competitive 
tactics  and  aggressions  against  the  National  was  to  make  out 
that,  in  so  far  as  there  was  a  conspiracy  against  the  Hallwood, 
it  was  due  to  provocation.  Provocation,  therefore,  was  a  pos- 
sible element  in  the  generic  conspiracy,  and,  if  so,  the  fact  of 
there  having  been  no  provocation  on  the  part  of  the  American, 
the  remote  successor  of  the  Hallwood,  would  make  it  open  to 
contend  that  the  general  conspiracy  was  never  directed  against 
it.  It  is  in  this  way  that  it  seems  to  us  that  the  evidence  as  to 
the  conduct  of  the  Hallwood  bore  on  the  question  whether  there 
was  a  conspiracy  against  the  American.  Then,  as  to  Steuben- 
rauch's  conduct:  The  tendency  thereof  was  to  show  that  the 
conduct  of  the  National's  sales  agent  complained  of  was  due  to 
that  conduct,  and  not  to  a  conspiracy  on  the  part  of  the  defend- 
ants against  the  American. 

Finally,  the  exclusion  of  the  letters  of  plaintiffs  in  error  High 
and  Snyder  to  the  plaintiff  in  error  Pflum,  of  date,  respectively, 
April  5,  1909,  and  April  6,  1909,  in  answer  to  his  circular  letter 
of  April  I,  1909,  to  the  district  managers,  heretofore  quoted  in 
full,  are  assigned  as  error.  In  those  letters  these  two  plaintiffs 
in  error  stated  that  the  policy  therein  outlined  had  been  pursued 
in  their  districts.  We  think  the  letters  were  admissible  in  evi- 
dence. They  were  written  nearly  three  years  before  the  finding 
of  the  indictment,  and  were  a  part  of  the  res  gestcB.  Hibbard 
v.  United  States,  172  Fed.  66,  70,  96  C.  C.  A.  554,  18  Ann.  Cas. 
1040;  Harrison  v.  United  States,  200  Fed.  674,  1 19  C.  C.  A.  78  ; 
Gould  V.  United  States,  209  Fed.  730,  126  C.  C.  A.  454.  If 
there  was  anything  in  the  circumstances  then  or  theretofore 
existing  affecting  their  good  faith,  they  were  for  the  jury  to 
consider,  just  as  it  was  for  them  to  determine  the  good  faith  of 
the  Pflum  circular. 


700  TRUSTS,   POOLS  AND   CORPORATIONS 

5.  It  remains  to  consider  the  errors  assigned  in  connection 
with  the  charge  to  the  jury.  But  few  exceptions  were  taken  to 
charge  which  was  given,  and  no  assignment  of  error  in  this  con- 
nection has  been  argued.  We  therefore  pass  these  exceptions 
by.  The  court  submitted  all  three  counts  to  the  jury.  The 
defendants  requested  that  the  jury  be  instructed  to  find  them 
not  guilty  on  the  second  and  third.  In  accordance  with  our 
holding  as  to  the  sufficiency  of  these  two  counts,  the  defendants 
were  entitled  to  have  the  jury  so  instructed.  The  first  count 
alone  should  have  been  submitted  to  them. 

The  court  clearly  told  the  jury  that  the  defendants  could  not 
be  found  guilty  under  that  count  unless  they  had  conspired 
within  the  three  years.  This,  of  course,  limited  the  case  upon 
which  they  could  be  so  found  to  competitors  in  existence  during 
the  three  years.  But  defendants  were  entitled  to  have  the  jury 
instructed  specifically  that  they  could  not  be  found  guilty  as  to  the 
competitors  who  ceased  to  exist  before  1907.  They  asked  specific 
instructions  to  this  effect.  These  instructions  were  given  as  to 
six  of  them.  They  should  have  been  given  as  to  the  other 
twenty.  That  such  instructions  were  given  as  to  six  made  it 
more  prejudicial  that  they  were  not  given  as  to  the  other 
twenty. 

The  defendants  also  requested  that  the  jury  be  specifically 
instructed  that  they  could  not  be  found  guilty  as  to  each  of  the 
six  competitors  who  were  in  existence  during  the  three  years. 
They  were  not  entitled  to  the  instruction  as  to  the  American  of 
Columbus.  They  were  entitled  to  the  instruction  as  to  the  other 
five.  There  was  no  substantial  evidence  that  within  the  five  years 
defendants  had  conspired  as  to  either  of  those  five  competitors. 
The  instructions  as  to  the  Burdick-Corbin  and  Jewell  were  given. 
Those  also  as  to  the  Peninsular,  Dial,  and  Michigan  should  have 
been  given.  The  defendants  further  requested  that  the  jury  be 
specifically  instructed  that  they  could  not  be  found  guilty  of 
having  conspired  within  the  three  years  in  restraint  by  the  use 
of  each  of  the  eleven  means  specified.  They  were  so  instructed 
as  to  the  fourth.  They  were  entitled  to  have  it  instructed  also  as 
to  the  sixth,  seventh,  eighth,  ninth,  and  eleventh.  Whilst,  as 
we  have  held,  the  first,  second,  and  third  means  were  non-effcc- 


NATIONAL   CASH    REGISTER   CASE  701 

tive,  without  more,  and  the  evidence  as  to  the  consTHfacy  within 
the  three  years  inchiding  cither  of  those  means  was  sHght  yet 
such  as  it  was  the  jury  was  entitled  to  consider  in  connection  with 
that  bearing  on  the  fifth  and  ninth  means,  and  no  instructions 
should  have  been  given  which  could  be  construed  as  excluding 
that  evidence.  That  it  is  reversible  error  to  submit  to  the  jury 
the  question  whether  the  conspiracy  in  question  includes  means 
of  which  there  is  no  evidence  follows  from  the  decision  in  Nash 
V.  United  States,  229  U.  S.  373,  33  Sup.  Ct.  780,  57  L.  Ed. 
1232.  The  grounds  upon  which  we  hold  the  court  erred  in  not 
giving  the  specific  instructions  indicated  appear  in  what  we  have 
had  to  say  on  defendants'  right  to  a  peremptory  instruction. 
The  giving  of  them  would  have  presented  sharply  to  the  jury 
the  only  ultimate  question  before  it,  to  wit,  whether  within  the 
three  years  the  defendants  conspired  in  restraint  of  the  in- 
terstate trade  or  commerce  in  cash  registers  of  the  Ameri- 
can of  Columbus  by  the  use  of  the  fifth  and  ninth  means 
specified. 

The  defendants  also  requested  the  giving  of  three  instructions 
embodying  certain  general  propositions  as  to  what  it  was  not 
unlawful  for  the  defendants  to  do  in  their  several  capacities  as 
officers  and  agents  of  the  National,  to  wit : 

(i)  To  require  the  agents  of  their  company  to  report  the  names  of 
persons  who  had  purchased  cash  registers  from  competitors,  or  to 
secure  samples  of  machines  from  time  to  time  put  on  the  market  by 
competitors. 

(2)  To  sell  or  offer  and  try  to  sell  National  cash  registers  to  persons 
who  had  bought  and  owned  competing  cash  registers  in  exchange  at 
such  price  as  was  satisfactory  to  the  parties. 

(3)  To  compare  by  comparative  demonstrations  or  otherwise  com- 
petitive cash  registers  with  National  cash  registers,  for  the  purpose 
of  demonstrating  the  superiority  of  the  National  cash  registers,  and 
thereby  induce  the  prospective  purchaser  to  purchase  the  National 
cash  register. 

No  objection  can  be  made  to  the  last  proposition,  but  the  other 
two  were  too  broad.  They  need  quahfication.  It  was  unlawful 
for  defendants  to  do  as  stated  in  the  second  proposition,  if  the 
doing  thereof  involved  the  purchaser  and  owner  of  the  compet- 


702  TRUSTS,   POOLS  AND   CORPORATIONS 

ino-  cash  register  breaking  his  contract  with  the  competitor  in 
any  particular,  or  was  done  for  the  purpose  of  driving  the  com- 
petitor out  of  the  cash  register  field.  One  competitor  has  the 
right  to  try  to  sell  by  fair  means  all  of  his  goods  that  he  can, 
and  if  the  effect  of  his  selling  is  to  drive  another  competitor  out 
of  the  field  he  is  not  to  blame.  But  it  is  wrong  for  one  competi- 
tor to  want  to  drive  another  competitor  from  the  field  by  unfair 
or  illegal  means,  and  to  take  steps  to  that  end,  so  that  he  may 
have  the  field  free  from  such  competition  and  thereby  be  en- 
abled to  sell  his  goods. 

Then,  as  to  reporting  purchasers  of  competing  registers  and 
securing  samples,  it  all  depends  on  the  manner  in  which  the 
information  in  the  one  instance  and  the  samples  in  the  other 
were  obtained  or  secured.  If  in  a  proper  manner,  nothing  un- 
lawful was  done. 

We  do  not  deem  it  necessary  to  consider  the  other  requests 
asked  and  refused. 

We  are  constrained,  therefore,  to  reverse  the  judgment  of  the 
lower  court,  and  remand  the  case  for  a  new  trial  and  further 
proceedings  consistent  herewith. 

A  detail  set  forth  in  the  government's  petition  and  estabhshed  by  evidence 
does  not  appear  in  this  opinion.  It  is  further  proof  of  the  predatory  tactics 
employed.  A  display  room  was  maintained  in  the  factory  at  Dayton,  known 
as  the  "  Graveyard,"  wherein  were  exhibited  all  the  machines  which  had  been 
"knocked  out."  Cards  were  attached  to  each  register,  giving  dates,  amount 
of  money  lost  and  similar  discouraging  information.  This  was  a  prominent 
feature  of  the  intimidation  program.  Obstinate  competitors  were  invited  to 
visit  Dayton  and  were  escorted  through  this  gruesome  exhibit.  —  Ed. 


XIX 

AMENDMENT  OF  THE  SHERMAN  ACT,  1914I 

After  years  of  public  agitation  the  Anti-Trust  Law  of  1890  was  at  last  supple- 
mented by  two  statutes  enacted  in  1914  after  seven  montiis  of  debate,  in  ful- 
fillment of  the  campaign  pledges  of  the  Democratic  party,  and  even  more 
particularly,  of  President  Wilson.  This  legislation  was  initiated  by  a  Presi- 
dential Message  on  January  20,  1914,  accompanying  five  proposed  bills,  fash- 
ioned upon  the  lines  of  the  "  Seven  Sisters  "  laws  in  New  Jersey.  These  five 
measures  finally  simmered  down  to  the  two,  known  respectively  as  the  Trade 
Commission  Law  and  the  Clayton  Anti-Trust  Act. 

The  first  four  sections  of  the  Trade  Commission  Law  require  little  explana- 
tion. They  merely  prescribe  the  form  of  the  commission,  its  manner  of  suc- 
cession to  the  Bureau  of  Corporations,  and  similar  routine  details.  Outwardly 
the  administrative  body  created  closely  resembled  the  Interstate  Commerce 
Commission.  It  is  in  the  5th  section  [together  with  section  11  of  the  Clay- 
ton Act]  that  the  real  innovation  in  the  whole  scheme  of  trust  regulation 
resides.  The  gist  of  the  entire  matter  lies  here.  For  while,  as  will  soon  ap- 
pear, the  Clayton  Act  prohibited  certain  specific  unfair  practices,  such  as  price 
discrimination  and  exclusive  tying  contracts,  section  5  of  the  Trade  Commis- 
sion Law,  in  terms  as  sweeping  as  those  of  the  Interstate  Commerce  Act  in 
condemning  all  unreasonable  railroad  rates,  declares  ''unfair  methods  of  com- 
petition in  commerce  unlawful."  This  is  the  section  which  transforms  the 
Trade  Commission  from  a  merely  investigatory  body  like  its  predecessor  the 
Bureau  of  Corporations,  into  an  administrative  agency  clothed  with  extended 
and,  as  I  believe,  necessary,  police  power.  This  authority  it  may  exercise  in 
the  public  interest  generally,  for  the  good  of  all  rather  than  to  satisfy  the 
claims  of  an  aggrieved  plaintiff,  whenever  it  has  reason  to  believe  that  any  un- 
fair method  of  competition  is  l)eing  employed.  In  other  words,  it  is  intended 
to  promote  the  standardization  of  business  practice  upon  a  higher  and  always 
a  decent  plane. 

As  for  the  machinery  for  enforcement,  as  well  as  the  penalties,  the  details 
are  set  forth  in  sections  5  and  6,  —  as  well  as  in  the  Clayton  Act,  soon  to  be 

1  Consult  Ainerican  Economic  Review,  Vol.  IV,  1915,  pp.  839-855,  and  Vol.  V, 
1915,  pp. 38-54;  Quarterly  Journal  of  Economics,  Vol.  XXIX,  1914,  pp.  72-97; 
Journal  of  Political  Economy,  Vol.  XXIII,  1915,  pp.  201-220,  305-326,  and  417-436. 

703 


704  TRUSTS,    POOLS  AND   CORPORATIONS 

described.  New  powers  to  initiate  investigation ;  to  prescribe  forms  of  ac- 
counting, such  as  shall,  for  instance,  be  really  illuminating  as  to  the  relative 
costs  of  production  under  various  forms  of  industrial  organization  ;  to  classify 
such  reports,  according  to  the  needs  in  each  case ;  and  to  cooperate  with  the 
Department  of  Justice  in  detecting  and  punishing  offenders ;  all  of  these 
powers  and  functions  make  the  Trade  Commission  law  an  experiment  of  the 
first  importance  in  the  exercise  of  state  authority  for  the  promotion  of  upright, 
straightforward  and  sportsmanlike  competition  — a  competition  which  shall 
stifle  neither  opportunity  nor  efficiency.  To  seek  this  end  by  means  of  the 
administrative  arm  of  the  government  acting  in  a  quasi-judicial  capacity, 
rather  than,  as  under  the  Sherman  Act,  by  the  agency  of  the  courts  alone,  is 
quite  in  consonance  with  the  tendency  of  the  times.  The  evident  aim  is  to 
secure  a  speedier,  more  direct,  and  essentially  economic,  rather  than  technically 
legal,  determination  of  vexatious  matters  of  business.  Stevens  —  foremost 
among  authorities  on  the  subject  —  does  not  overstate  the  case  in  the  conclu- 
sion ^  that  the  Trade  Commission  Act  is  ''an  important  step  .  .  .  toward  the 
ultimate  solution  of  the  trust  problem."  Given  a  fair  field  and  no  secret  or 
discriminatory  favors,  and  competition  may  well  be  relied  upon  to  maintain  or 
even  to  reestablish  itself  in  the  face  of  impersonal  and  so  often  unwieldy 
monopoly.  But  the  success  of  this  plan,  it  should  be  added,  depends  more 
directly  upon  the  tact  and  ability  of  the  members  of  the  commission  than  upon 
many  verbal  details  of  the  law  itself.  Pettifogging  membership  may  easily 
wreck  the  experiment ;  a  broad  statesmanlike  personnel  may  lead  it  on  to 
success.  —  Ed. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of 
the  United  States  of  America  in  Congress  assembled.  That  a 
commission  is  hereby  created  and  estabhshed,  to  be  known  as 
the  Federal  Trade  Commission  (hereinafter  referred  to  as  the 
commission),  which  shall  be  composed  of  five  commissioners, 
who  shall  be  appointed  by  the  President,  by  and  with  the  advice 
and  consent  of  the  Senate.  Not  more  than  three  of  the  com- 
missioners shall  be  members  of  the  same  poHtical  party.  The 
first  commissioners  appointed  shall  continue  in  office  for  terms 
of  three,  four,  five,  six,  and  seven  years,  respectively,  from  the 
date  of  the  taking  effect  of  this  Act,  the  term  of  each  to  be 
designated  by  the  President,  but  their  successors  shall  be 
appointed  for  terms  of  seven  years,  except  that  any  person 
chosen  to  fill  a  vacancy  shall  be  appointed  only  for  the  unex- 

1  American  Economic  Review^  Vol.  IV,  1915,  p-  854. 


AMENDMENT  OF  THE  SHERMAN  ACT,  19 14    705 

pired  term  of  the  commissioner  whom  he  shall  succeed.  The 
commission  shall  choose  a  chairman  from  its  own  membership. 
No  commissioner  shall  engage  in  any  other  business,  vocation, 
or  employment.  Any  commissioner  may  be  removed  by  the 
President  for  inefficiency,  neglect  of  duty,  or  malfeasance  in 
office.  A  vacancy  in  the  commission  shall  not  impair  the  right 
of  the  remaining  commissioners  to  exercise  all  the  powers  of 
the  commission. 

The  commission  shall  have  an  official  seal,  which  shall  be 
judicially  noticed. 

Sec.  2.  That  each  commissioner  shall  receive  a  salary  of 
$10,000  a  year,  payable  in  the  same  manner  as  the  salaries  of 
the  judges  of  the  courts  of  the  United  States.  The  commission 
shall  appoint  a  secretary,  who  shall  receive  a  salary  of  $5000  a 
year,  payable  in  like  manner,  and  it  shall  have  authority  to 
employ  and  fix  the  compensation  of  such  attorneys,  special 
experts,  examiners,  clerks,  and  other  employees  as  it  may  from 
time  to  time  find  necessary  for  the  proper  performance  of  its 
duties  and  as  may  be  from  time  to  time  appropriated  for  by 
Congress. 

With  the  exception  of  the  secretary,  a  clerk  to  each  commis- 
sioner, the  attorneys,  and  such  special  experts  and  examiners  as 
the  commission  may  from  time  to  time  find  necessary  for  the 
conduct  of  its  work,  all  employees  of  the  commission  shall  be  a 
part  of  classified  civil  service,  and  shall  enter  the  service  under 
such  rules  and  regulations  as  may  be  prescribed  by  the  commis- 
sion and  by  the  Civil  Service  Commission. 

All  of  the  expenses  of  the  commission,  including  all  necessary 
expenses  for  transportation  incurred  by  the  commissioners  or  by 
their  employees  under  their  orders,  in  making  any  investigation, 
or  upon  official  business  in  any  other  places  than  in  the  city  of 
Washington,  shall  be  allowed  and  paid  on  the  presentation  of 
itemized  vouchers  therefor  approved  by  the  commission. 

Until  otherwise  provided  by  law,  the  commission  may  rent 
suitable  offices  for  its  use. 

The  Auditor  for  the  State  and  Other  Departments  shall  re- 
ceive and  examine  all  accounts  of  expenditures  of  the  com- 
mission. 


7o6  TRUSTS,    POOLS  AND   CORPORATIONS 

Sec.  3.  That  upon  the  organization  of  the  commission  and 
election  of  its  chairman,  the  Bureau  of  Corporations  and  the 
offices  of  Commissioner  and  Deputy  Commissioner  of  Corpora- 
tions shall  cease  to  exist ;  and  all  pending  investigations  and 
proceedings  of  the  Bureau  of  Corporations  shall  be  continued  by 
the  commission. 

All  clerks  and  employees  of  the  said  bureau  shall  be  trans- 
ferred to  and  become  clerks  and  employees  of  the  commission 
at  their  present  grades  and  salaries.  All  records,  papers,  and 
property  of  the  said  bureau  shall  become  records,  papers,  and 
property  of  the  commission,  and  all  unexpended  funds  and  appro- 
priations for  the  use  and  maintenance  of  the  said  bureau, 
including  any  allotment  already  made  to  it  by  the  Secretary  of 
Commerce  from  the  contingent  appropriation  for  the  Depart- 
ment of  Commerce  for  the  fiscal  year  nineteen  hundred  and 
fifteen,  or  from  the  departmental  printing  fund  for  the  fiscal 
year  nineteen  hundred  and  fifteen,  shall  become  funds  and 
appropriations  available  to  be  expended  by  the  commission  in 
the  exercise  of  the  powers,  authority,  and  duties  conferred  on  it 
by  this  Act. 

The  principal  office  of  the  commission  shall  be  in  the  city  of 
Washington,  but  it  may  meet  and  exercise  all  its  powers  at  any 
other  place.  The  commission,  may,  by  one  or  more  of  its 
members,  or  by  such  examiners,  as  it  may  designate,  prosecute  any 
inquiry  necessary  to  its  duties  in  any  part  of  the  United  States. 

Sec.  4.  That  the  words  defined  in  this  section  shall  have  the 
following  meaning  when  found  in  this  Act,  to  wit : 

"Commerce"  means  commerce  among  the  several  States  or 
with  foreign  nations,  or  in  any  Territory  of  the  United  States  or 
in  the  District  of  Columbia,  or  between  any  such  Territory  and 
another,  or  between  any  such  Territory  and  any  State  or  foreign 
nation,  or  between  the  District  of  Columbia  and  any  State  or 
Territory  or  foreign  nation. 

"  Corporation "  means  any  company  or  association  incor- 
porated or  unincorporated,  which  is  organized  to  carry  on  busi- 
ness for  profit  and  has  shares  of  capital  or  capital  stock,  and 
any  company  or  association,  incorporated  or  unincorporated, 
without  shares  of  capital  or  capital  stock,  except  partnerships, 


AMENDMENT  OF  THE  SHERMAN  ACT,  19 14   707 

which  is  organized  to  carry  on  business  for  its  own  profit  or 
that  of  its  members. 

"  Documentary  evidence  "  means  all  documents,  papers,  and 
correspondence  in  existence  at  and  after  the  passage  of  this  Act. 

"Acts  to  regulate  commerce"  means  the  act  entitled  "An 
Act  to  regulate  commerce,"  approved  February  fourteenth, 
eighteen  hundred  and  eighty-seven,  and  all  acts  amendatory 
thereof  and  supplementary  thereto. 

"Anti-trust  acts  "  means  the  Act  entitled  "An  Act  to  protect 
trade  and  commerce  against  unlawful  restraints  and  monop- 
olies," approved  July  second,  eighteen  hundred  and  ninety ; 
also  the  sections  seventy-three  to  seventy-seven,  inclusive,  of  an 
Act  entitled  "  An  Act  to  reduce  taxation,  to  provide  revenue  for 
the  Government,  and  for  other  purposes,"  approved  August 
twenty-seventh,  eighteen  hundred  and  ninety-four;  and  also  the 
Act  entitled  "  An  Act  to  amend  sections  seventy-three  and 
seventy-six  of  the  Act  of  August  twenty-seventh,  eighteen  hun- 
dred and  ninety-four,  entitled  'An  Act  to  reduce  taxation,  to 
provide  revenue  for  the  Government,  and  for  other  purposes,'  " 
approved  February  twelfth,  nineteen  hundred  and  thirteen. 

Sec.  5.  That  unfair  methods  of  competition  in  commerce  are 
hereby  declared  unlawful. 

The  commission  is  hereby  empowered  and  directed  to  pre- 
vent persons,  partnerships,  or  corporations,  except  banks,  and 
common  carriers  subject  to  the  Acts  to  regulate  commerce,  from 
using  unfair  methods  of  competition  in  commerce. 

Whenever  the  commission  shall  have  reason  to  believe  that 
any  such  person,  partnership,  or  corporation  has  been  or  is 
using  any  unfair  method  of  competition  in  commerce,  and  if  it 
shall  appear  to  the  commission  that  a  proceeding  by  it  in  respect 
thereof  would  be  to  the  interest  of  the  pubhc,  it  shall  issue  and 
serve  upon  such  person,  partnership,  or  corporation  a  complaint 
stating  its  charges  in  that  respect,  and  containing  a  notice  of  a 
hearing  upon  a  day  and  at  a  place  therein  fixed  at  least  thirty 
days  after  the  service  of  said  complaint.  The  person,  partner- 
ship, or  corporation  so  complained  of  shall  have  the  right  to 
appear  at  the  place  and  time  so  fixed  and  show  cause  why  an 
order  should  not  be  entered  by  the  commission  requiring  such 


708  TRUSTS,    POOLS   AND   CORPORATIONS 

person,  partnership,  or  corporation  to  cease  and  desist  from  the 
violation  of  the  law  so  charged  in  said  complaint.  Any  person, 
partnership,  or  corporation  may  make  application,  and  upon 
good  cause  shown  may  be  allowed  by  the  commission,  to  inter- 
vene and  appear  in  said  proceeding  by  counsel  or  in  person. 
The  testimony  in  any  such  proceeding  shall  be  reduced  to  writ- 
ing and  filed  in  the  office  of  the  commission.  If  upon  such 
hearing  the  commission  shall  be  of  the  opinion  that  the  method 
of  competition  in  question  is  prohibited  by  this  Act,  it  shall 
make  a  report  in  writing  in  which  it  shall  state  its  findings  as  to 
the  facts,  and  shall  issue  and  cause  to  be  served  on  such  person, 
partnership,  or  corporation  an  order  requiring  such  person, 
partnership,  or  corporation  to  cease  and  desist  from  using  such 
method  of  competition.  Until  a  transcript  of  the  record  in  such 
hearing  shall  have  been  filed  in  a  circuit  court  of  appeals  of  the 
United  States,  as  hereinafter  provided,  the  commission  may  at 
any  time,  upon  such  notice  and  in  such  manner  as  it  shall  deem 
proper,  modify  or  set  aside,  in  whole  or  in  part,  any  report  or 
any  order  made  or  issued  by  it  under  this  section. 

If  such  person,  partnership,  or  corporation  fails  or  neglects 
to  obey  such  order  of  the  commission  while  the  same  is  in  effect, 
the  commission  may  apply  to  the  circuit  court  of  appeals  of 
the  United  States,  within  any  circuit  where  the  method  of  com- 
petition in  question  was  used  or  where  such  person,  partnership, 
or  corporation  resides  or  carries  on  business,  for  the  enforce- 
ment of  its  order,  and  shall  certify  and  file  with  its  application 
a  transcript  of  the  entire  record  in  the  proceeding,  including 
all  the  testimony  taken  and  the  report  and  order  of  the  com- 
mission. Upon  such  filing  of  the  application  and  transcript  the 
court  shall  cause  notice  thereof  to  be  served  upon  such  person, 
partnership,  or  corporation  and  thereupon  shall  have  jurisdiction 
of  the  proceeding  and  of  the  question  determined  therein,  and 
shall  have  power  to  make  and  enter  upon  the  pleadings,  testi- 
mony, and  proceedings  set  forth  in  such  transcript  a  decree 
affirming,  modifying,  or  setting  aside  the  order  of  the  commis- 
sion. The  findings  of  the  commission  as  to  the  facts,  if  sup- 
ported by  testimony,  shall  be  conclusive.  If  either  party  shall 
apply  to  the  court  for  leave  to  adduce  additional  evidence,  and 


AMENDMENT   OF   THE   SHERMAN    ACT,    1914        709 

shall  show  to  the  satisfaction  of  the  court  that  sucfr*additional 
evidence  is  material  and  that  there  were  reasonable  grounds  for~ 
the  failure  to  adduce  such  evidence  in  the  proceeding  before  the 
commission,  the  court  may  order  such  additional  evidence  to  be 
taken  before  the  commission  and  to  be  adduced  upon  the  hear- 
ing in  such  manner  and  upon  such  terms  and  conditions  as  to 
the  court  may  seem  proper.  The  commission  may  modify  its 
findings  as  to  the  facts,  or  make  new  findings,  by  reason  of  the 
additional  evidence  so  taken,  and  it  shall  file  such  modified  or 
new  findings,  which,  if  supported  by  testimony,  shall  be  con- 
clusive, and  its  recommendation,  if  any,  for  the  modification  or 
setting  aside  of  its  original  order,  with  the  return  of  such  addi- 
tional evidence.  The  judgment  and  decree  of  the  court  shall  be 
final,  except  that  the  same  shall  be  subject  to  review  by  the 
Supreme  Court  upon  certiorari  as  provided  in  section  two  hun- 
dred and  forty  of  the  Judicial  Code. 

Any  party  required  by  such  order  of  the  commission  to  cease 
and  desist  from  using  such  method  of  competition  may  obtain  a 
review  of  such  order  in  said  circuit  court  of  appeals  by  filing  in 
the  court  a  written  petition  praying  that  the  order  of  the  com- 
mission be  set  aside.  A  copy  of  such  petition  shall  be  forthwith 
served  upon  the  commission,  and  thereupon  the  commission 
forthwith  shall  certify  and  file  in  the  court  a  transcript  of  the 
record  as  hereinbefore  provided.  Upon  the  filing  of  the  tran- 
script the  court  shall  have  the  same  jurisdiction  to  affirm,  set 
aside,  or  modify  the  order  of  the  commission  as  in  the  case  of 
an  application  by  the  commission  for  the  enforcement  of  its 
order,  and  the  findings  of  the  commission  as  to  the  facts,  if  sup- 
ported by  testimony,  shall  in  like  manner  be  conclusive. 

The  jurisdiction  of  the  circuit  court  of  appeals  of  the  United 
States  to  enforce,  set  aside,  or  modify  orders  of  the  commission 
shall  be  exclusive. 

Such  proceedings  in  the  circuit  court  of  appeals  shall  be 
given  precedence  over  other  cases  pending  therein,  and  shall 
be  in  every  way  expedited.  No  order  of  the  commission  or 
judgment  of  the  court  to  enforce  the  same  shall  in  any  wise 
relieve  or  absolve  any  person,  partnership,  or  corporation  from 
any  liability  under  the  anti-trust  acts. 


7IO  TRUSTS,   POOLS  AND   CORPORATIONS 

Complaints,  orders,  and  other  processes  of  the  commission 
under  this  section  may  be  served  by  any  one  duly  authorized  by 
the  commission,  either  (n)  by  delivering  a  copy  thereof  to  the 
person  to  be  served,  or  to  a  member  of  the  partnership  to  be 
served,  or  to  the  president,  secretary,  or  other  executive  officer 
or  a  director  of  the  corporation  to  be  served ;  or  (d)  by  leaving 
a  copy  thereof  at  the  principal  office  or  place  of  business  of 
such  person,  partnership,  or  corporation ;  or  (c)  by  registering 
or  mailing  a  copy  thereof  addressed  to  such  person,  partnership, 
or  corporation  at  his  or  its  principal  office  or  place  of  business. 
The  verified  return  by  the  person  so  serving  said  complaint, 
order,  or  other  process  setting  forth  the  manner  of  said  service 
shall  be  proof  of  the  same,  and  the  return  post-office  receipt 
for  said  complaint,  order,  or  other  process  registered  and  mailed 
as  aforesaid  shall  be  proof  of  the  service  of  the  same. 

Sec.  6.     That  the  commission  shall  also  have  power  — 

{a)  To  gather  and  compile  information  concerning,  and  to 
investigate  from  time  to  time  the  organization,  business,  conduct, 
practices,  and  mianagement  of  any  corporation  engaged  in  com- 
merce, excepting  banks  and  common  carriers  subject  to  the  Act 
to  regulate  commerce,  and  its  relation  to  other  corporations  and 
to  individuals,  associations,  and  partnerships. 

{d)  To  require,  by  general  or  special  orders,  corporations  en- 
gaged in  commerce,  excepting  banks,  and  common  carriers  sub- 
ject to  the  Act  to  regulate  commerce,  or  any  class  of  them,  or 
any  of  them,  respectively,  to  file  with  the  commission  in  such 
form  as  the  commission  may  prescribe  annual  or  special,  or  both 
annual  and  special,  reports  or  answers  in  writing  to  specific 
questions,  furnishing  to  the  commission  such  information  as  it 
may  require  as  to  the  organization,  business,  conduct,  practices, 
management,  and  relation  to  other  corporations,  partnerships, 
and  individuals  of  the  respective  corporations  filing  such  reports 
or  answers  in  writing.  Such  reports  and  answers  shall  be  made 
under  oath,  or  otherwise,  as  the  commission  may  prescribe,  and 
shall  be  filed  with  the  commission  within  such  reasonable  period 
as  the  commission  may  prescribe,  unless  additional  time  be 
granted  in  any  case  by  the  commission. 

(c)   Whenever  a  final  decree  has  been  entered  against  any 


AMENDMENT   OF   THE    SHERMAN   ACT,    1914        711 

defendant  corporation  in  any  suit  brought  by  the  United  States 
to  prevent  and  restrain  any  violation  of  the  anti-trust  Acts,  to 
make  investigation,  upon  its  own  initiative,  of  the  manner  in 
which  the  decree  has  been  or  is  being  carried  out,  and  upon  the 
application  of  the  Attorney-General  it  shall  be  its  duty  to  make 
such  investigation.  It  shall  transmit  to  the  Attorney-General 
a  report  embodying  its  findings  and  recommendations  as  a  result 
of  any  such  investigation,  and  the  report  shall  be  made  public  in 
the  discretion  of  the  commission. 

{d)  Upon  the  direction  of  the  President  or  either  House  of 
Congress  to  investigate  and  report  the  facts  relating  to  any 
alleged  violations  of  the  anti-trust  Acts  by  any  corporation. 

(<?)  Upon  the  application  of  the  Attorney  General  to  investi- 
gate and  make  recommendations  for  the  readjustment  of  the 
business  of  any  corporation  alleged  to  be  violating  the  anti-trust 
Acts  in  order  that  the  corporation  may  thereafter  maintain  its 
organization,  management,  and  conduct  of  business  in  accordance 
with  law. 

(/)  To  make  public  from  time  to  time  such  portions  of  the 
information  obtained  by  it  hereunder,  except  trade  secrets  and 
names  of  customers,  as  it  shall  deem  expedient  in  the  public 
interest ;  and  to  make  annual  and  special  reports  to  the  Congress 
and  to  submit  therewith  recommendations  for  additional  legisla- 
tion ;  and  to  provide  for  the  publication  of  its  reports  and 
decisions  in  such  form  and  manner  as  may  be  best  adapted  for 
public  information  and  use. 

{g)  From  time  to  time  to  classify  corporations  and  to  make 
rules  and  regulations  for  the  purpose  of  carrying  out  the  provi- 
sions of  this  Act. 

{h)  To  investigate,  from  time  to  time,  trade  conditions  in  and 
with  foreign  countries  where  associations,  combinations,  or  prac- 
tices of  manufacturers,  merchants,  or  traders,  or  other  conditions, 
may  affect  the  foreign  trade  of  the  United  States,  and  to  report 
to  Congress  thereon,  with  such  recommendations  as  it  deems 
advisable. 

Sec.  7.  That  in  any  suit  in  equity  brought  by  or  under  the 
direction  of  the  Attorney-General  as  provided  in  the  anti-trust 
Acts,  the  court  may,  upon  the  conclusion  of  the  testimony  therein, 


712  TRUSTS,    POOLS   AND    CORPORATIONS 

if  it  shall  be  then  of  opinion  that  the  complainant  is  entitled  to 
relief,  refer  said  suit  to  the  commission,  as  a  master  in  chancery, 
to  ascertain  and  report  an  appropriate  form  of  decree  therein. 
The  commission  shall  proceed  upon  such  notice  to  the  parties 
and  under  such  rules  of  procedure  as  the  court  may  prescribe, 
and  upon  the  coming  in  of  such  report  such  exceptions  may  be 
filed  and  such  proceedings  had  in  relation  thereto  as  upon  the 
report  of  a  master  in  other  equity  causes,  but  the  court  may 
adopt  or  reject  such  report,  in  whole  or  in  part,  and  enter  such 
decree  as  the  nature  of  the  case  may  in  its  judgment  require. 

Sec.  8.  That  the  several  departments  and  bureaus  of  the  gov- 
ernment when  directed  by  the  President  shall  furnish  the  com- 
mission, upon  its  request,  all  records,  papers,  and  information  in 
their  possession  relating  to  any  corporation  subject  to  any  of  the 
provisions  of  this  Act,  and  shall  detail  from  time  to  time  such 
officials  and  employees  to  the  commission  as  he  may  direct. 

Sec.  9.  That  for  the  purposes  of  this  Act  the  commission,  or 
its  duly  authorized  agent  or  agents,  shall  at  all  reasonable  times 
have  access  to,  for  the  purpose  of  examination,  and  the  right  to 
copy  any  documentary  evidence  of  any  corporation  being  inves- 
tigated or  proceeded  against ;  and  the  commission  shall  have 
power  to  require  by  subpoena  the  attendance  and  testimony  of 
witnesses  and  the  production  of  all  such  documentary  evidence 
relating  to  any  matter  under  investigation.  Any  member  of  the 
commission  may  sign  subpoenas,  and  members  and  examiners  of 
the  commission  may  administer  oaths  and  affirmations,  examine 
witnesses,  and  receive  evidence. 

Such  attendance  of  witnesses,  and  the  production  of  such 
documentary  evidence,  may  be  required  from  any  place  in  the 
United  States,  at  any  designated  place  of  hearing.  And  in  case 
of  disobedience  to  a  subpoena  the  commission  may  invoke  the 
aid  of  any  court  of  the  United  States  in  requiring  the  attendance 
and  testimony  of  witnesses  and  the  production  of  documentary 
evidence. 

Any  of  the  district  courts  of  the  United  States  within  the 
jurisdiction  of  which  such  inquiry  is  carried  on  may,  in  case  of 
contumacy  or  refusal  to  obey  a  subpoena  issued  to  any  corpora- 
tion or  other  person,  issue  an  order  requiring  such  corporation 


AMENDMENT   OF   THE    SHERMAN    ACT.    19 14        713 

or  other  person  to  appear  before  the  commission,  of'to  produce 
documentary  evidence  if  so  ordered,  or  to  give  evidence  touching 
the  matter  in  question  ;  and  any  faikn-e  to  obey  such  order  of 
the  court  may  be  punished  ]3y  such  court  as  a  contempt 
thereof. 

Upon  the  apphcation  of  the  Attorney-General  of  the  United 
States,  at  the  request  of  the  commission,  the  district  courts  of 
the  United  States  shall  have  jurisdiction  to  issue  writs  of  man- 
damus commanding  any  person  or  corporation  to  comply  with 
the  provisions  of  this  Act  or  any  order  of  the  commission  made 
in  pursuance  thereof. 

The  commission  may  order  testimony  to  be  taken  by  deposi- 
tion in  any  proceeding  or  investigation  pending  under  this  Act 
at  any  stage  of  such  proceeding  or  investigation.  Such  dep- 
ositions may  be  taken  before  any  person  designated  by  the 
commission  and  having  power  to  administer  oaths.  Such 
testimony  shall  be  reduced  to  writing  by  the  person  taking  the 
deposition,  or  under  his  direction,  and  shall  then  be  subscribed 
by  the  deponent.  Any  person  may  be  compelled  to  appear 
and  depose  and  to  produce  documentary  evidence  in  the  same 
manner  as  witnesses  may  be  compelled  to  appear  and  testify 
and  produce  documentary  evidence  before  the  commission  as 
hereinbefore  provided. 

Witnesses  summoned  before  the  commission  shall  be  paid  the 
same  fees  and  mileage  that  are  paid  witnesses  in  the  courts  of 
the  United  States,  and  witnesses  whose  depositions  are  taken 
and  the  persons  taking  the  same  shall  severally  be  entitled  to 
the  same  fees  as  are  paid  for  like  services  in  the  courts  of  the 
United  States. 

No  person  shall  be  excused  from  attending  and  testifying  or 
from  producing  documentary  evidence  before  the  commission  or 
in  obedience  to  the  subpoena  of  the  commission  on  the  ground 
or  for  the  reason  that  the  testimony  or  evidence,  documentary 
or  otherwise,  required  of  him  may  tend  to  criminate  him  or  sub- 
ject him  to  a  penalty  or  forfeiture.  But  no  natural  person  shall 
be  prosecuted  or  subjected  to  any  penalty  or  forfeiture  for  or 
on  account  of  any  transaction,  matter,  or  thing  concerning  which 
he  may  testify,  or  produce  evidence,  documentary  or  otherwise, 


714  TRUSTS,    POOLS   AND   CORPORATIONS 

before  the  commission  in  obedience  to  a  subpoena  issued  by  it  : 
Provided,  That  no  natural  person  so  testifying  shall  be  exempt 
from  prosecution  and  punishment  for  perjury  committed  in  so 
testifying. 

Sec.  io.  That  any  person  who  shall  neglect  or  refuse  to 
attend  and  testify,  or  to  answer  any  lawful  inquiry,  or  to  produce 
documentary  evidence,  if  in  his  power  to  do  so,  in  obedience  to 
the  subpoena  or  lawful  requirement  of  the  commission,  shall  be 
guilty  of  an  offense  and  upon  conviction  thereof  by  a  court  of 
competent  jurisdiction  shall  be  punished  by  a  fine  of  not  less 
than  $1000,  nor  more  than  $5000,  or  by  imprisonment  for  not 
more  than  one  year,  or  by  both  such  fine  and  imprisonment. 

Any  person  who  shall  willfully  make,  or  cause  to  be  made, 
any  false  entry  or  statement,  of  fact  in  any  report  required  to 
be  made  under  this  Act,  or  who  shall  willfully  make,  or  cause 
to  be  made,  any  false  entry  in  any  account,  record,  or  memo- 
randum kept  by  any  corporation  subject  to  this  Act,  or  who  shall 
willfully  neglect  or  fail  to  make,  or  to  cause  to  be  made,  full, 
true,  and  correct  entries  in  such  accounts,  records,  and  memo- 
randa of  all  facts  and  transactions  appertaining  to  the  business 
of  such  corporation,  or  who  shall  willfully  remove  out  of  the 
jurisdiction  of  the  United  States,  or  willfully  mutilate,  alter,  or  by 
any  other  means  falsify  any  documentary  evidence  of  such  corpo- 
ration, or  who  shall  willfully  refuse  to  submit  to  the  commission 
or  to  any  of  its  authorized  agents,  for  the  purpose  of  inspection 
and  taking  copies,  any  documentary  evidence  of  such  corpora- 
tion in  his  possession  or  within  his  control,  shall  be  deemed 
guilty  of  an  offense  against  the  United  States,  and  shall  be  sub- 
ject, upon  conviction  in  any  court  of  the  United  States  of  com- 
petent jurisdiction,  to  a  fine  of  not  less  than  $1000  nor  more 
than  $5000,  or  to  imprisonment  for  a  term  of  not  more  than 
three  years,  or  to  both  such  fine  and  imprisonment. 

If  any  corporation  required  by  this  Act  to  file  any  annual  or 
special  report  shall  fail  so  to  do  within  the  time  fixed  by  the 
commission  for  filing  the  same,  and  such  failure  shall  continue 
for  thirty  days  after  notice  of  such  default,  the  corporation  shall 
forfeit  to  the  United  States  the  sum  of  $100  for  each  and  every 
day  of  the  continuance  of  such  failure,  which  forfeiture  shall  be 


AMENDMENT   OF   THE   SHERMAN    ACT,    1914        715 

payable  into  the  Treasury  of  the  United  States,  and  shall  be 
recoverable  in  a  civil  suit  in  the  name  of  the  United  States 
brought  in  the  district  where  the  corporation  has  its  principal 
office  or  in  any  district  in  which  it  shall  do  business.  It  shall 
be  the  duty  of  the  various  district  attorneys,  under  the  direction 
of  the  Attorney-General  of  the  United  States,  to  prosecute  for 
the  recovery  of  forfeitures.  The  costs  and  expenses  of  such 
prosecution  shall  be  paid  out  of  the  appropriation  for  the  ex- 
penses of  the  courts  of  the  United  States. 

Any  officer  or  employee  of  the  commission  who  shall  make 
public  any  information  obtained  by  the  commission  without  its 
authority,  unless  directed  by  a  court,  shall  be  deemed  guilty  of  a 
misdemeanor,  and,  upon  conviction  thereof,  shall  be  punished  by 
a  fine  not  exceeding  $5000  or  by  imprisonment  not  exceeding  one 
year,  or  by  fine  and  imprisonment,  in  the  discretion  of  the  court. 

Sec.  II.  Nothing  contained  in  this  Act  shall  be  construed 
to  prevent  or  interfere  with  the  enforcement  of  the  provisions 
of  the  anti-trust  Acts  or  the  Acts  to  regulate  commerce,  nor 
shall  anything  contained  in  the  Act  be  construed  to  alter,  modify, 
or  repeal  the  said  anti-trust  Acts  or  Acts  to  regulate  commerce 
or  any  part  or  parts  thereof. 

Approved,  September  26,  1914. 

THE   CLAYTON    ACT 

The  Clayton  Act  "  to  supplement  existing  laws  against  unlawful  restraints 
and  monopolies,"  —  that  is  to  say,  the  Sherman  Anti-Trust  Law.  —  is  a  hodge- 
podge, compounded  of  various  details,  many  unnecessary,  some  conflicting, 
others  positively  mischievous.  It  is  the  expression  of  an  honest  popular  pur- 
pose to  remedy  existing  economic  evils  and  to  fulfill  Democratic  campaign 
pledges.  But  it  is  a  broth  which  clearly  suffers  from  too  many  cooks  ;  or,  to 
change  figures,  a  hammer  which  aims  to  hit  too  many  nails  on  the  head  at 
one  and  the  same  time.  Unfair  trade  practices,  interlocking  directorates, 
intercorporate  stockholdings,  dishonest  railroad  financing,  the  legal  status  of 
trade-unions  and  even  the  use  of  injunctions  in  labor  disputes,  are  all  com- 
prehended within  the  statute.  Our  attention,  naturally,  must  be  focused  upon 
•those  features  of  the  act  which  deal  specifically  with  the  preservation  of  an 
open  market  and  a  fair  field  for  all  comers  in  business.  Yet  it  is  probable 
that  many  of  these  details  of  the  law  represent  a  compromise,  that  is  to  say, 
a  give-and-take  between  opposing  groups  in  Congress.     Without  the  contempt 


7i6  TRUSTS,    POOLS   AND   CORPORATIONS 

of  court  and  injunction  sections,  approval  of  the  restraint  of  trade  clauses 
would  probably  have  failed  of  support  from  the  labor  vote.  One  may  hesitate 
perhaps  to  follow  Professor  Young  to  the  extent  of  characterizing  the  Clay- 
ton Act  as  "  bungling  and  generally  futile."  One  may  with  greater  confi- 
dence assent  to  Stevens'  conclusion  that,  so  far  as  amendment  of  the  Sherman 
Act  is  concerned.  "  no  harm  has  been  done ;  "  and  in  certain  details,  such  as 
the  prohibition  of  tying  arrangements,  the  new  legislation  was  rendered 
necessary  by  instant  decisions  of  the  Supreme  Court  of  the  United  States. 
Turning  to  the  text  of  the  statute,  section  2  specifically  prohibits  price 
discrimination  between  different  purchasers  of  commodities.  This  was  ob- 
viously aimed  at  such  tactics  as  local  price  cutting,  so  successfully  utilized  by  the 
Standard  Oil  Company  to  build  up  its  monopoly.  But  it  will  be  observed  that 
this  statute  enables  the  suppression  of  such  acts,  not  merely  when  incidental 
to  the  creation  of  monopoly  but  at  all  times  and  under  all  circumstances.  If 
price  cutting  be  not  advantageous  to  the  community  in  general,  as  the  better 
economic  opinion  now  holds,  a  real  addition  to  the  Sherman  Act  has  been 
made  hereby.  But  whether  the  same  end  had  not  already  been  achieved  in 
the  o-eneral  prohibition  of  unfair  business  practices  in  the  Trade  Commission 
Law,  is  at  least  debatable.  It  is  also  open  to  question  whether  the  permission 
to  vary  prices  "  in  good  faith  to  meet  competition  "  may  not  open  the  door  to 
nullification  of  the  entire  section  and  possibly  to  weaken  the  Sherman  Act 
itself.  Whether  it  will  do  so  or  not,  depends  upon  how  constructively  the 
courts  virtually  legislate  in  interpretation  of  the  statute.  Section  3  of 
the  law  contains  another  specific  prohibition,  supplementary,  or  it  may  be, 
defining  to  that  extent,  both  the  Sherman  Act  and  the  Trade  Commission 
Law.  For  it  declares  unlawful,  all  exclusive  or  tying  clauses,  such  as  have  been 
employed  by  the  United  Shoe  Machinery  Company  in  its  leases  of  machinery, 
by  the  Thread  and  Photographic  combinations  in  their  selling  agreements  with 
jobbers  and  retailers,  or  by  the  electric  lamp  pool  in  its  purchasing  contracts. 
In  view  of  recent  pronouncements  of  the  United  States  Supreme  Court  in 
patent  decisions,  notably  in  the  Dick  case,  a  clear  definition  of  the  rights  of 
traders  would  seem  to  have  been  needed.  Section  5  is  an  important  one, 
in  that  it  relieves  the  plaintiff  in  a  suit  for  damages  under  the  Act,  of  proof  of 
the  offense,  if  that  has  already  once  been  established  in  a  Federal  proceeding. 
The  following  sections  6,  7,  8,  9,  and  10  have  to  do  with  matters  only  inci- 
dentally related  to  the  trust  problem.  The  prohibition  of  intercorporate 
stockholdings  reverts  to  the  issue  of  the  holding  company  already  discussed  in 
connection  with  the  Northern  Securities  case  ;  while  the  restrictions  upon  inter- 
locking directorates  touch  the  subtle  details  of  credit  and  banking  facilities.^ 
Section  9  dealing  with  common  carriers  resulted  from  the  disclosures  in  the 
New  Haven  and  Rock  Island  scandals  of  the  time.^ 

1  Ripley,  Railroads:    Finance  and  Organization,  pp.  471,  524,  etc. 


AMENDMENT   OF   THE    SHERMAN    ACT,    1914        717 

The  remainder  of  the  Act  deals  with  procedure,  enforcemen^and  penalties. 
Much  of  it  is  highly  technical.  It  a])pcars  to  he  bungling,  where,  for  example, 
it  provides  for  final  decision  upon  the  prohibitions  of  tiie  Act  by  both  the 
Supreme  Court  and  the  Circuit  Court  of  Appeals.  It  provides  for  duplica- 
tion and  possible  conflict  of  autiiority  by  vesting  enforcement  in  the  Depart- 
ment of  Justice  as  well  as  in  the  Trade  Commission.  It  will  also  be  noted 
that  the  omission  of  all  criminal  penalties,  as  have  been  ineffectively  imposed 
in  a  few  instances  in  the  past,  rests  everything  upon  the  employment  of  con- 
tempt of  court  procedure  in  future.  The  provision  in  section  14,  whereby 
the  act  of  a  corporation  shall  be  deemed  that  of  its  directors,  would  seem  to 
express  a  need  of  the  time, — a  need,  however,  so  apparent  that  the  courts 
seem  independently  in  a  fair  way  to  solve  the  difficulty  without  recourse  to 
the  new  statute.  Section  1 1  of  the  Clayton  Act,  as  we  have  already  noted, 
dovetails  into  section  5  of  the  Trade  Commission  Law,  and  needs  to  be  con- 
sidered in  connection  with  it. 

Whatever  the  shortcomings  of  tlie  measure,  one  cannot  withhold  admira- 
tion for  the  steadfastness  of  purpose,  the  worthiness  of  motive  and  the  ex- 
traordinary political  ability  of  President  Wilson  in  achieving  this  fulfillment  of 
the  pledges  of  his  party  in  the  face  of  seemingly  insuperable  difficulties. —  Ed. 

Be  it  enacted  by  the  Senate  and  Honse  of  Representatives  of  the 
United  States  of  America  in  Congress  assembled,  That  "anti- 
trust laws,"  as  used  herein,  includes  the  Act  entitled  "An  Act 
to  protect  trade  and  commerce  against  unlawful  restraints 
and  monopolies,"  approved  July  second,  eighteen  hundred  and 
ninety;  sections  seventy-three  to  seventy-seven,  inclusive,  of  an 
Act  entitled  "  An  Act  to  reduce  taxation,  to  provide  revenue  for 
the  Government,  and  for  other  purposes,"  of  August  twenty- 
seventh,  eighteen  hundred  and  ninety-four ;  an  Act  entitled 
"  An  Act  to  amend  sections  seventy-three  and  seventy-six  of 
the  Act  of  August  twenty-seventh,  eighteen  hundred  and  ninety- 
four,  entitled  '  An  Act  to  reduce  taxation,  to  provide  revenue  for 
the  Government,  and  for  other  purposes,' "  approved  February 
twelfth,  nineteen  hundred  and  thirteen ;  and  also  this  Act. 

"  Commerce,"  as  used  herein,  means  trade  or  commerce  among 
the  several  States  and  with  foreign  nations,  or  between  the  Dis- 
trict of  Columbia  or  any  Territory  of  the  United  States  and  any 
State,  Territory,  or  foreign  nation,  or  between  any  insular  pos- 
sessions or  other  places  under  the  jurisdiction  of  the  United 
States,  or  between  any  such  possession  or  place  and  any  State 


7i8  TRUSTS,    POOLS   AND   CORPORATIONS 

or  Territory  of  the  United  States  or  the  District  of  Columbia  or 
any  foreign  nation,  or  within  the  District  of  Columbia  or  any 
Territory  or  any  insular  possession  or  other  place  under  the 
jurisdiction  of  the  United  States  :  Provided,  That  nothing  in  this 
Act  contained  shall  apply  to  the  FhiHppine  Islands. 

The  word  "  person  "  or  "  persons  "  wherever  used  in  this  Act 
shall  be  deemed  to  include  corporations  and  associations  existing 
under  or  authorized  by  the  laws  of  either  the  United  States,  the 
laws  of  any  of  the  Territories,  the  laws  of  any  State,  or  the  laws 
of  any  foreign  country. 

Sec.  2.  That  it  shall  be  unlawful  for  any  person  engaged  in 
commerce,  in  the  course  of  such  commerce,  either  directly  or 
indirectly  to  discriminate  in  price  between  different  purchasers 
of  commodities  which  commodities  are  sold  for  use,  consump- 
tion, or  resale  within  the  United  States  or  any  Territory  thereof 
or  the  District  of  Columbia  or  any  insular  possession  or  other 
place  under  the  jurisdiction  of  the  United  States,  where  the 
effect  of  such  discrimination  may  be  to  substantially  lessen 
competition  or  tend  to  create  a  monopoly  in  any  line  of  com- 
merce :  Provided,  That  nothing  herein  contained  shall  prevent 
discrimination  in  price  between  purchasers  of  commodities  on 
account  of  differences  in  the  grade,  quality,  or  quantity  of  the 
commodity  sold,  or  that  makes  only  due  allowance  for  difference 
in  the  cost  of  selling  or  transportation,  or  discrimination  in  price 
in  the  same  or  different  communities  made  in  good  faith  to  meet 
competition:  And  provided  further,  That  nothing  herein  con- 
tained shall  prevent  persons  engaged  in  selling  goods,  wares,  or 
merchandise  in  commerce  from  selecting  their  own  customers  in 
bo7ia  fide  transactions  and  not  in  restraint  of  trade. 

Sec.  3.  That  it  shall  be  unlawful  for  any  person  engaged  in 
commerce,  in  the  course  of  such  commerce,  to  lease  or  make  a 
sale  or  contract  for  sale  of  goods,  wares,  merchandise,  machinery, 
supplies  or  other  commodities,  whether  patented  or  unpatented, 
for  use,  consumption  or  resale  within  the  United  States  or  any 
Territory  thereof  or  the  District  of  Columbia  or  any  insular  pos- 
session or  other  place  under  the  jurisdiction  of  the  United  States, 
or  fix  a  price  charged  therefor,  or  discount  from,  or  rebate  upon, 
such  price,  on  the  condition,  agreement  or  understanding  that 


AMENDMENT  OF  THE  SHERMAN  ACT,  19 14    719 

the  lessee  or  purchaser  thereof  shall  not  use  or  deal  rrfthc  goods, 
wares,  merchandise,  machinery,  sui)plies  or  other  commodities 
of  a  competitor  or  competitors  of  the  lessor  or  seller,  where  the 
effect  of  such  lease,  sale,  or  contract  for  sale  or  such  condition, 
agreement  or  understanding  may  be  to  substantially  lessen  com- 
petition or  tend  to  create  a  monopoly  in  any  line  of  commerce. 

Sec.  4.  That  any  person  who  shall  be  injured  in  his  business 
or  property  by  reason  of  anything  forbidden  in  the  anti-trust 
laws  may  sue  therefor  in  any  district  court  in  the  United  States 
in  the  district  in  which  the  defendant  resides  or  is  found  or  has 
an  agent,  without  respect  to  the  amount  in  controversy,  and 
shall  recover  threefold  the  damages  by  him  sustained,  and  the 
cost  of  suit,  including  a  reasonable  attorney's  fee. 

Sec.  5.  That  a  final  judgment  or  decree  hereafter  rendered 
in  any  criminal  prosecution  or  in  any  suit  or  proceeding  in  equity 
brought  by  or  on  behalf  of  the  United  States  under  the  anti- 
trust laws  to  the  effect  that  a  defendant  has  violated  said  laws 
shall  \)Q  pri}>ia  facie  evidence  against  such  defendant  in  any  suit 
or  proceeding  brought  by  any  other  party  against  such  defend- 
ant under  said  laws  as  to  all  matters  respecting  which  said  judg- 
ment or  decree  would  be  an  estoppel  as  between  the  parties 
thereto:  Provided,  This  section  shall  not  apply  to  consent  judg- 
ments or  decrees  entered  before  any  testimony  has  been  taken  : 
Provided  further,  This  section  shall  not  apply  to  consent  judgments 
or  decrees  rendered  in  criminal  proceedings  or  suits  in  equity, 
now  pending,  in  which  the  taking  of  testimony  has  been  com- 
menced but  has  not  been  concluded,  provided  such  judgments 
or  decrees  are  rendered  before  any  further  testimony  is  taken. 

Whenever  any  suit  or  proceeding  in  equity  or  criminal  prose- 
cution is  instituted  by  the  United  States  to  prevent,  restrain  or 
punish  violations  of  any  of  the  anti-trust  laws,  the  running  of  the 
statute  of  limitations  in  respect  of  each  and  every  private  right 
of  action  arising  under  said  laws  and  based  in  whole  or  in  part 
on  any  matter  complained  of  in  said  suit  or  proceeding  shall  be 
suspended  during  the  pendency  thereof. 

Sec.  6.  That  the  labor  of  a  human  being  is  not  a  commodity 
or  article  of  commerce.  Nothing  contained  in  the  anti-trust  laws 
shall  be  construed  to  forbid  the  existence  and  operation  of  labor, 


720  TRUSTS,    POOLS   AND    CORPORATIONS 

agricultural,  or  horticultural  organizations,  instituted  for  the  pur- 
poses of  mutual  help,  and  not  having  capital  stock  or  conducted 
for  profit,  or  to  forbid  or  restrain  individual  members  of  such 
organizations  from  lawfully  carrying  out  the  legitimate  objects 
thereof  ;  nor  shall  such  organizations,  or  the  members  thereof, 
be  held  or  construed  to  be  illegal  combinations  or  conspiracies 
in  restraint  of  trade,  under  the  anti-trust  laws. 

Sec.  7.  That  no  corporation  engaged  in  commerce  shall 
acquire,  directly  or  indirectly  the  whole  or  any  part  of  the 
stock  or  other  share  capital  of  another  corporation  engaged 
also  in  commerce,  where  the  effect  of  such  acquisition  niay  be 
to  substantially  lessen  competition  between  the  corporation 
whose  stock  is  so  acquired  and  the  corporation  making  the 
acquisition,  or  to  restrain  such  commerce  in  any  section  or  com- 
munity, or  tend  to  create  a  monopoly  of  any  line  of  commerce. 

No  corporation  shall  acquire,  directly  or  indirectly,  the  whole 
or  any  part  of  the  stock  or  other  share  capital  of  two  or  more 
corporations  engaged  in  commerce  where  the  effect  of  such 
acquisition,  or  the  use  of  such  stock  by  the  voting  or  granting 
of  proxies  or  otherwise,  may  be  to  substantially  lessen  competi- 
tion between  such  corporations,  or  any  of  them,  whose  stock 
or  other  share  capital  is  so  acquired,  or  to  restrain  such  com- 
merce in  any  section  or  community,  or  tend  to  create  a  monop- 
oly of  any  line  of  commerce. 

This  section  shall  not  apply  to  corporations  purchasing  such 
stock  solely  for  investment  and  not  using  the  same  by  voting  or 
otherwise  to  bring  about,  or  in  attempting  to  bring  about,  the  sub- 
stantial lessening  of  competition.  Nor  shall  anything  contained 
in  this  section  prevent  a  corporation  engaged  in  commerce  from 
causing  the  formation  of  subsidiary  corporations  for  the  actual 
carrying  on  of  their  immediate  lawful  business,  or  the  natural 
and  legitimate  branches  or  extensions  thereof,  or  from  owning 
and  holding  all  or  a  part  of  the  stock  of  such  subsidiary  cor- 
porations, when  the  effect  of  such  formation  is  not  to  substan- 
tially lessen  competition. 

Nor  shall  anything  herein  contained  be  construed  to  prohibit 
any  common  carrier  subject  to  the  laws  to  regulate  commerce 
from  aiding  in  the  construction  of  branches  or  short  lines  so 


AMENDMENT   OF   THE   SHERMAN    ACT,    1914        721 

located  as  to  become  feeders  to  the  main  line  of  tl^g  company 
so  aiding  in  such  construction  or  from  acquiring  or  owning  all 
or  any  part  of  the  stock  of  such  branch  lines,  nor  to  prevent 
any  such  common  carrier  from  acquiring  and  owning  all  or  any 
part  of  the  stock  of  a  branch  or  short  line  constructed  by  an 
independent  company  where  there  is  no  substantial  competition 
between  the  company  owning  the  branch  line  so  constructed 
and  the  company  owning  the  main  line  acquiring  the  property 
or  an  interest  therein,  nor  to  prevent  such  common  carrier  from 
extending  any  of  its  lines  through  the  medium  of  the  acquisition 
of  stock  or  otherwise  of  any  other  such  common  carrier  where 
there  is  no  substantial  competition  between  the  company  extend- 
ing its  lines  and  the  company  whose  stock,  property,  or  an 
interest  therein  is  so  acquired. 

Nothing  contained  in  this  section  shall  be  held  to  affect  or 
impair  any  right  heretofore  legally  acquired  :  Provided,  That 
nothing  in  this  section  shall  be  held  or  construed  to  authorize  or 
make  lawful  anything  heretofore  prohibited  or  made  illegal  by 
the  anti-trust  laws,  nor  to  exempt  any  person  from  the  penal 
provisions  thereof  or  the  civil  remedies  therein  provided. 

Sec.  8.  That  from  and  after  two  years  from  the  date  of  the 
approval  of  this  Act  no  person  shall  at  the  same  time  be  a 
director  or  other  officer  or  employee  of  more  than  one  bank, 
banking  association  or  trust  company,  organized  or  operating 
under  the  laws  of  the  United  States,  either  of  which  has 
deposits,  capital,  surplus,  and  undivided  profits  aggregating 
more  than  $5,000,000;  and  no  private  banker  or  person  who  is 
a  director  in  any  bank  or  trust  company,  organized  and  operating 
under  the  laws  of  a  State,  having  deposits,  capital,  surplus,  and 
undivided  profits  aggregating  more  than  $5,000,000,  shall  be 
eligible  to  be  a  director  in  any  bank  or  banking  association 
organized  or  operating  under  the  laws  of  the  United  States. 
The  eligibility  of  a  director,  officer,  or  employee  under  the  fore- 
going provisions  shall  be  determined  by  the  average  amount  of 
deposits,  capital,  surplus,  and  undivided  profits  as  shown  in  the 
official  statements  of  such  bank,  banking  association,  or  trust 
company  filed  as  provided  by  law  during  the  fiscal  year  next 
preceding  the  date  set  for  the  annual  election  of  directors,  and 


722  TRUSTS,    POOLS   AND    CORPORATIONS 

when  a  director,  officer,  or  employee  has  been  elected  or  selected 
in  accordance  with  the  provisions  of  this  Act  it  shall  be  lawful 
for  him  to  continue  as  such  for  one  year  thereafter  under  said 
election  or  employment. 

No  bank,  banking  association  or  trust  company,  organized  or 
operating  under  the  laws  of  the  United  States,  in  any  city  or 
incorporated  town  or  village  of  more  than  two  hundred  thousand 
inhabitants,  as  shown  by  the  last  preceding  decennial  census  of 
the  United  States,  shall  have  as  a  director  or  other  officer  or 
employee  any  private  banker  or  any  director  or  other  officer  or 
employee  of  any  other  bank,  banking  association  or  trust  com- 
pany located  in  the  same  place :  Provided,  That  nothing  in 
this  section  shall  apply  to  mutual  savings  banks  not  having  a 
capital  stock  represented  by  shares  :  Provided  fnrtJier,  That  a 
director  or  other  officer  or  employee  of  such  bank,  banking 
association,  or  trust  company  may  be  a  director  or  other  officer 
or  employee  of  not  more  than  one  other  bank  or  trust  company 
organized  under  the  laws  of  the  United  States  or  any  State 
where  the  entire  capital  stock  of  one  is  owned  by  stockholders  in 
the  other  :  Ajid  provided  further,  That  nothing  contained  in  this 
section  shall  forbid  a  director  of  class  A  of  a  Federal  reserve 
bank,  as  defined  in  the  Federal  Reserve  Act  from  being  an 
officer  or  director  or  both  an  officer  and  director  in  one  member 
bank. 

That  from  one  and  after  two  years  from  the  date  of  the 
approval  of  this  Act  no  person  at  the  same  time  shall  be  a 
director  in  any  two  or  more  corporations,  any  one  of  which  has 
capital,  surplus,  and  undivided  profits  aggregating  more  than 
;^ 1, 000,000,  engaged  in  whole  or  in  part  in  commerce,  other 
than  banks,  banking  associations,  trust  companies  and  common 
carriers  subject  to  the  Act  to  regulate  commerce,  approved 
February  fourth,  eighteen  hundred  and  eighty-seven,  if  such 
corporations  are  or  shall  have  been  theretofore,  by  virtue  of 
their  business  and  location  of  operation,  competitors,  so  that  the 
elimination  of  competition  by  agreement  between  them  would 
constitute  a  violation  of  any  of  the  provisions  of  any  of  the  anti- 
trust laws.  The  eligibility  of  a  director  under  the  foregoing 
provision  shall  be  determined  by  the  aggregate  amount  of  the 


AMENDMENT   OF  THE   SHERMAN    ACT,    1914        723 

capital,  surplus,  and  undivided  profits,  exclusive  of_  dividends 
declared  but  not  paid  to  stockholders,  at  the  end  of  the  fiscal 
year  of  said  corporation  next  preceding  the  election  of  directors, 
and  when  a  director  has  been  elected  in  accordance  with  the 
provisions  of  this  Act  it  shall  be  lawful  for  him  to  continue  as 
such  for  one  year  thereafter. 

When  any  person  elected  or  chosen  as  a  director  or  oflficer 
or  selected  as  an  employee  of  any  bank  or  other  corporation 
subject  to  the  provisions  of  this  Act  is  eligible  at  the  time  of  his 
election  or  selection  to  act  for  such  bank  or  other  corporation  in 
such  capacity  his  eligibility  to  act  in  such  capacity  shall  not  be 
affected  and  he  shall  not  become  or  be  deemed  amenable  to  any 
of  the  provisions  hereof  by  reason  of  any  change  in  the  affairs 
of  such  bank  or  other  corporation  from  whatsoever  cause,  whether 
specifically  excepted  by  any  of  the  provisions  hereof  or  not, 
until  the  expiration  of  one  year  from  the  date  of  his  election  or 
employment. 

Sec.  9.  Every  president,  director,  officer  or  manager  of  any 
firm,  association  or  corporation  engaged  in  commerce  as  a  com- 
mon carrier,  who  embezzles,  steals,  abstracts  or  willfully  mis- 
applies, or  willfully  permits  to  be  misapplied,  any  of  the  moneys, 
funds,  credits,  securities,  property  or  assets  of  such  firm,  associ- 
ation or  corporation,  arising  or  accruing  from,  or  used  in,  such 
commerce,  in  whole  or  in  part,  or  willfully  or  knowingly  con- 
verts the  same  to  his  own  use  or  to  the  use  of  another,  shall  be 
deemed  guilty  of  a  felony  and  upon  conviction  shall  be  fined 
not  less  than  $500  or  confined  in  the  penitentiary  not  less  than 
one  year  nor  more  than  ten  years,  or  both,  in  the  discretion  of 
the  court. 

Prosecutions  hereunder  may  be  in  the  district  court  of  the 
United  States  for  the  district  wherein  the  offense  may  have 
been  committed. 

That  nothing  in  this  section  shall  be  held  to  take  away  or 
impair  the  jurisdiction  of  the  courts  of  the  several  States  under 
the  laws  thereof ;  and  a  judgment  of  conviction  or  acquittal  on 
the  merits  under  the  laws  of  any  State  shall  be  a  bar  to  any 
prosecution  hereunder  for  the  same  act  or  acts. 

Sec.  10.    That  after  two  years  from  the  approval  of  this  Act 


724  TRUSTS,   POOLS  AND   CORPORATIONS 

no  common  carrier  engaged  in  commerce  shall  have  any  deal- 
ings in  securities,  supplies  or  other  articles  of  commerce,  or 
shall  make  or  have  any  contracts  for  construction  or  mainte- 
nance of  any  kind,  to  the  amount  of  more  than  $50,000,  in  the 
aggregate,  in  any  one  year,  with  another  corporation,  firm, 
partnership  or  association  when  the  said  common  carrier  shall 
have  upon  its  board  of  directors  or  as  its  president,  manager  or 
as  its  purchasing  or  selling  officer,  or  agent  in  the  particular 
transaction,  any  person  who  is  at  the  same  time  a  director, 
manager,  or  purchasing  or  selling  officer  of,  or  who  has  any 
substantial  interest  in,  such  other  corporation,  firm,  partnership 
or  association,  unless  and  except  such  purchases  shall  be  made 
from,  or  such  dealings  shall  be  with,  the  bidder  whose  bid  is  the 
most  favorable  to  such  common  carrier,  to  be  ascertained  by 
competitive  bidding  under  regulations  to  be  prescribed  by  rule 
or  otherwise  by  the  Interstate  Commerce  Commission.  No  bid 
shall  be  received  unless  the  name  and  address  of  the  bidder  or 
the  names  and  addresses  of  the  officers,  directors  and  general 
managers  thereof,  if  the  bidder  be  a  corporation,  or  of  the  mem- 
bers, if  it  be  a  partnership  or  firm,  be  given  with  the  bid. 

Any  person  who  shall,  directly  or  indirectly,  do  or  attempt  to 
do  anything  to  prevent  anyone  from  bidding  or  shall  do  any  act 
to  prevent  free  and  fair  competition  among  the  bidders  or  those 
desiring  to  bid  shall  be  punished  as  prescribed  in  this  section  in 
the  case  of  an  officer  or  director. 

Every  such  common  carrier  having  any  such  transactions  or 
making  any  such  purchases  shall  within  thirty  days  after  mak- 
ing the  same  file  with  the  Interstate  Commerce  Commission  a 
full  and  detailed  statement  of  the  transaction  showing  the  manner 
of  the  competitive  bidding,  who  were  the  bidders,  and  the  names 
and  addresses  of  the  directors  and  officers  of  the  corporations 
and  the  members  of  the  firm  or  partnership  bidding ;  and  when- 
ever the  said  commission  shall,  after  investigation  or  hearing, 
have  reason  to  beUeve  that  the  law  has  been  violated  in  and 
about  the  said  purchases  or  transactions  it  shall  transmit  all 
papers  and  documents  and  its  own  views  of  findings  regarding 
the  transaction  to  the  Attorney  General. 

If  any  common  carrier  shall    violate  this  section  it  shall  be 


AMENDMENT   OF   THE    SHERMAN   ACT,    19 14        725 

fined  not  exceeding  $25,000;  and  every  such  dii=eetor,  agent, 
manager  or  officer  thereof  who  shall  have  knowingly  voted  for 
or  directed  the  act  constituting  such  violation  or  who  shall  have 
aided  or  abetted  in  such  violation  shall  be  deemed  guilty  of  a 
misdemeanor  and  shall  be  fined  not  exceeding  $5,000,  or  con- 
fined in  jail  not  exceeding  one  year,  or  both,  in  the  discretion  of 
the  court. 

Sec^  II.  That  authority  to  enforce  compliance  with  sections 
two,  three,  seven  and  eight  of  this  Act  by  the  persons  respec- 
tively subject  thereto  is  hereby  vested :  in  the  Interstate  Com- 
merce Commission  where  applicable  to  common  carriers,  in  the 
Federal  Reserve  Board  where  applicable  to  banks,  banking 
associations  and  trust  companies,  and  in  the  Federal  Trade 
Commission  where  applicable  to  all  other  character  of  com- 
merce, to  be  exercised  as  follows  : 

Whenever  the  commission  or  board  vested  with  jurisdiction 
thereof  shall  have  reason  to  beUeve  that  any  person  is  violating 
or  has  violated  any  of  the  provisions  of  sections  two,  three, 
seven  and  eight  of  this  Act,  it  shall  issue  and  serve  upon  such 
person  a  complaint  stating  its  charges  in  that  respect,  and  con- 
taining a  notice  of  a  hearing  upon  a  day  and  at  a  place  therein 
fixed  at  least  thirty  days  after  the  service  of  said  complaint. 
The  person  so  complained  of  shall  have  the  right  to  appear  at 
the  place  and  time  so  fixed  and  show  cause  why  an  order  should 
not  be  entered  by  the  commission  or  board  requiring  such  per- 
son to  cease  and  desist  from  the  violation  of  the  law  so  charged 
in  said  complaint.  Any  person  may  make  application,  and 
upon  good  cause  shown  may  be  allowed  by  the  commission  or 
board,  to  intervene  and  appear  in  said  proceeding  by  counsel  or 
in  person.  The  testimony  in  any  such  proceeding  shall  be  re- 
duced to  writing  and  filed  in  the  office  of  the  commission  or 
board.  If  upon  such  hearing  the  commission  or  board,  as  the 
case  may  be,  shall  be  of  the  opinion  that  any  of  the  provisions 
of  said  sections  have  been  or  are  being  violated,  it  shall  make  a 
report  in  writing  in  which  it  shall  state  its  findings  as  to  the 
facts,  and  shall  issue  and  cause  to  be  served  on  such  person  an 
order  requiring  such  person  to  cease  and  desist  from  such  vio- 
lations, and  divest  itself  of  the  stock  held  or  rid  itself  of  the 


726  TRUSTS,   POOLS  AND   CORPORATIONS 

directors  chosen  contrary  to  the  provisions  of  sections  seven  and 
eight  of  this  Act,  if  any  there  be,  in  the  manner  and  within  the 
time  fixed  by  said  order.  Until  a  transcript  of  the  record  in 
such  hearing  shall  have  been  filed  in  a  circuit  court  of  appeals 
of  the  United  States,  as  hereinafter  provided,  the  commission  or 
board  may  at  any  time,  upon  such  notice  and  in  such  manner  as 
it  shall  deem  proper,  modify  or  set  aside,  in  whole  or  in  part, 
any  report  or  any  order  made  or  issued  by  it  under  this  section. 
If  such  person  fails  or  neglects  to  obey  such  order  of  the 
commission  or  board  while  the  same  is  in  effect,  the  commis- 
sion or  board  may  apply  to  the  circuit  court  of  appeals  of  the 
United  States,  within  any  circuit  where  the  violation  complained 
of  was  or  is  being  committed  or  where  such  person  resides  or 
carries  on  business,  for  the  enforcement  of  its  order,  and  shall 
certify  and  file  with  its  application  a  transcript  of  the  entire 
record  in  the  proceeding,  including  all  the  testimony  taken  and 
the  report  and  order  of  the  commission  or  board.  Upon  such 
filing  of  the  application  and  transcript  the  court  shall  cause 
notice  thereof  to  be  served  upon  such  person  and  thereupon 
shall  have  jurisdiction  of  the  proceeding  and  of  the  question  de- 
termined therein,  and  shall  have  power  to  make  and  enter  upon 
the  pleadings,  testimony,  and  proceedings  set  forth  in  such 
transcript  a  decree  affirming,  modifying,  or  setting  aside  the 
order  of  the  commission  or  board.  The  findings  of  the  commis- 
sion or  board  as  to  the  facts,  if  supported  by  testimony,  shall  be 
conclusive.  If  either  party  shall  apply  to  the  court  for  leave  to 
adduce  additional  evidence,  and  shall  show  to  the  satisfaction  of 
the  court  that  such  additional  evidence  is  material  and  that  there 
were  reasonable  grounds  for  the  failure  to  adduce  such  evidence 
in  the  proceeding  before  the  commission  or  board,  the  court  may 
order  such  additional  evidence  to  be  taken  before  the  commis- 
sion or  board  and  to  be  adduced  upon  the  hearing  in  such 
manner  and  upon  such  terms  and  conditions  as  to  the  court  may 
seem  proper.  The  commission  or  board  may  modify  its  find- 
ings as  to  the  facts,  or  make  new  findings,  by  reason  of  the  ad- 
ditional evidence  so  taken,  and  it  shall  file  such  modified  or  new 
findings,  which,  if  supported  by  testimony,  shall  be  conclusive, 
and  its  recommendation,  if  any,  for  the  modification  or  setting 


AMENDMENT   OF   THE   SHERMAN    ACT,    1914        727 

aside  of  its  original  order,  with  the  return  of  sucn  additional 
evidence.  The  judgment  and  decree  of  the  court  shall  be  final, 
except  that  the  same  shall  be  subject  to  review  by  the  Supreme 
Court  upon  certiorari  as  provided  in  section  two  hundred  and 
forty  of  the  Judicial  Code. 

Any  party  required  by  such  order  of  the  commission  or  board 
to  cease  and  desist  from  a  violation  charged  may  obtain  a  review 
of  such  order  in  said  circuit  court  of  appeals  by  filing  in  the 
court  a  written  petition  praying  that  the  order  of  the  commis- 
sion or  board  be  set  aside.  A  copy  of  such  petition  shall  be 
forthwith  served  upon  the  commission  or  board,  and  thereupon 
the  commission  or  board  forthwith  shall  certify  and  file  in  the 
court  a  transcript  of  the  record  as  hereinbefore  provided. 
Upon  the  filing  of  the  transcript  the  court  shall  have  the  same 
jurisdiction  to  afifirm,  set  aside,  or  modify  the  order  of  the  com- 
mission or  board  as  in  the  case  of  an  application  by  the  commis- 
sion or  board  for  the  enforcement  of  its  order,  and  the  findings 
of  the  commission  or  board  as  to  the  facts,  if  supported  by  testi- 
mony, shall  in  like  manner  be  conclusive. 

The  jurisdiction  of  the  circuit  court  of  appeals  of  the  United 
States  to  enforce,  set  aside,  or  modify  orders  of  the  commission 
or  board  shall  be  exclusive. 

Such  proceedings  in  the  circuit  court  of  appeals  shall  be  given 
precedence  over  other  cases  pending  therein,  and  shall  be  in 
every  way  expedited.  No  order  of  the  commission  or  board  or 
the  judgment  of  the  court  to  enforce  the  same  shall  in  any  wise 
relieve  or  absolve  any  person  from  any  liability  under  the  anti- 
trust Acts. 

Complaints,  orders,  and  other  processes  of  the  commission  or 
board  under  this  section  may  be  served  by  anyone  duly  au- 
thorized by  the  commission  or  board,  either  {a)  by  delivering  a 
copy  thereof  to  the  person  to  be  served,  or  to  a  member  of  the 
partnership  to  be  served,  or  to  the  president,  secretary,  or  other 
executive  officer  or  a  director  of  the  corporation  to  be  served  ; 
or  {It)  by  leaving  a  copy  thereof  at  the  principal  office  or  place 
of  business  of  such  person  ;  or  (r)  by  registering  and  mailing  a 
copy  thereof  addressed  to  such  person  at  his  principal  ofifice  or 
place  of  business.     The  verified  return  by  the  person  so  serving 


728  TRUSTS,    POOLS  AND   CORPORATIONS 

said  complaint,  order,  or  other  process  setting  forth  the  manner 
of  said  service  shall  be  proof  of  the  same,  and  the  return  post- 
office  receipt  for  said  complaint,  order,  or  other  process  regis- 
tered and  mailed  as  aforesaid  shall  be  proof  of  the  service  of  the 
same. 

Sec.  12.  That  any  suit,  action,  or  proceeding  under  the  anti- 
trust laws  against  a  corporation  may  be  brought  not  only  in  the 
judicial  district  whereof  it  is  an  inhabitant,  but  also  in  any  dis- 
trict wherein  it  may  be  found  or  transacts  business ;  and  all 
process  in  such  cases  may  be  served  in  the  district  of  which  it 
is  an  inhabitant,  or  wherever  it  may  be  found. 

Sec.  13.  That  in  any  suit,  action,  or  proceeding  brought  by  or 
on  behalf  of  the  United  States  subpoenas  for  witnesses  who  are 
required  to  attend  a  court  of  the  United  States  in  any  judicial 
district  in  any  case,  civil  or  criminal,  arising  under  the  antitrust 
laws  may  run  into  any  other  district :  Provided,  That  in  civil 
cases  no  writ  of  subpoena  shall  issue  for  witnesses  living  out  of 
the  district  in  which  the  court  is  held  at  a  greater  distance  than 
one  hundred  miles  from  the  place  of  holding  the  same  without 
the  permission  of  the  trial  court  being  first  had  upon  proper  ap- 
plication and  cause  shown. 

Sec.  14.  That  whenever  a  corporation  shall  violate  any  of  the 
penal  provisions  of  the  antitrust  laws,  such  violation  shall  be 
deemed  to  be  also  that  of  the  individual  directors,  officers,  or 
agents  of  such  corporation  who  shall  have  authorized,  ordered,  or 
done  any  of  the  acts  constituting  in  whole  or  in  part  such  violation, 
and  such  violation  shall  be  deemed  a  misdemeanor,  and  upon 
conviction  therefor  of  any  such  director,  officer,  or  agent  he 
shall  be  punished  by  a  fine  of  not  exceeding  ;^5,ooo  or  by  im- 
prisonment for  not  exceeding  one  year,  or  by  both,  in  the  dis- 
cretion of  the  court. 

Sec.  15.  That  the  several  district  courts  of  the  United  States 
are  hereby  invested  with  jurisdiction  to  prevent  and  restrain 
violations  of  this  Act,  and  it  shall  be  the  duty  of  the  several  dis- 
trict attorneys  of  the  United  States,  in  their  respective  districts, 
under  the  direction  of  the  Attorney  General,  to  institute  pro- 
ceedings in  equity  to  prevent  and  restrain  such  violations. 
Such  proceedings  may  be  by  way  of  petition  setting  forth  the 


AMENDMENT  OF  THE  SHERMAN  ACT,  19 14    729 

case  and  praying  that  such  violation  shall  be  enjoifffd  or  other- 
wise prohibited.  When  the  parties  complained  of  shall  have 
been  duly  notified  of  such  petition,  the  court  shall  proceed,  as 
soon  as  may  be,  to  the  hearing  and  determination  of  the  case ; 
and  pending  such  petition,  and  before  final  decree,  the  court 
may  at  any  time  make  such  temporary  restraining  order  or  pro- 
hibition as  shall  be  deemed  just  in  the  premises.  Whenever  it 
shall  appear  to  the  court  before  which  any  such  proceeding  may 
be  pending  that  the  ends  of  justice  require  that  other  parties 
should  be  brought  before  the  court,  the  court  may  cause  them 
to  be  summoned  whether  they  reside  in  the  district  in  which  the 
court  is  held  or  not,  and  subpoenas  to  that  end  may  be  served 
in  any  district  by  the  marshal  thereof. 

Sec.  16.  That  any  person,  firm,  corporation,  or  association 
shall  be  entitled  to  sue  for  and  have  injunctive  relief,  in  any 
court  of  the  United  States  having  jurisdiction  over  the  parties, 
against  threatened  loss  or  damage  by  a  violation  of  the  antitrust 
laws,  including  sections  two,  three,  seven  and  eight  of  this  Act, 
when  and  under  the  same  conditions  and  principles  as  injunctive 
relief  against  threatened  conduct  that  will  cause  loss  or  damage 
is  granted  by  courts  of  equity,  under  the  rules  governing  such 
proceedings,  and  upon  the  execution  of  proper  bond  against 
damages  for  an  injunction  improvidently  granted  and  a  showing 
that  the  danger  of  irreparable  loss  or  damage  is  immediate,  a 
preliminary  injunction  may  issue  :  Provided,  That  nothing  herein 
contained  shall  be  construed  to  entitle  any  person,  firm,  corpora- 
tion, or  association,  except  the  United  States,  to  bring  suit  in 
equity  for  injunctive  relief  against  any  common  carrier  subject 
to  the  provisions  of  the  Act  to  regulate  commerce,  approved 
February  fourth,  eighteen  hundred  and  eighty-seven,  in  respect 
of  any  matter  subject  to  the  regulation,  supervision,  or  other 
jurisdiction  of  the  Interstate  Commerce  Commission. 

Sec  17.  That  no  preliminary  injunction  shall  be  issued  with- 
out notice  to  the  opposite  party. 

No  temporary  restraining  order  shall  be  granted  without 
notice  to  the  opposite  party  unless  it  shall  clearly  appear  from 
specific  facts  shown  by  af^davit  or  by  the  verified  bill  that  im- 
mediate and  irreparable  injury,  loss,  or  damage  will  result  to  the 


730  TRUSTS,   POOLS  AND   CORPORATIONS 

applicant  before  notice  can  be  served  and  a  hearing  had  thereon. 
Every  such  temporary  restraining  order  shall  be  indorsed  with 
the  date  and  hour  of  issuance,  shall  be  forthwith  filed  in  the 
clerk's  office  and  entered  of  record,  shall  define  the  injury  and 
state  why  it  is  irreparable  and  why  the  order  was  granted  with- 
out notice,  and  shall  by  its  terms  expire  within  such  time  after 
entry,  not  to  exceed  ten  days,  as  the  court  or  judge  may  fix, 
unless  within  the  time  so  fixed  the  order  is  extended  for  a  like 
period  for  good  cause  shown,  and  the  reasons  for  such  extension 
shall  be  entered  of  record.  In  case  a  temporary  restraining 
order  shall  be  granted  without  notice  in  the  contingency  speci- 
fied, the  matter  of  the  issuance  of  a  preliminary  injunction  shall 
be  set  down  for  a  hearing  at  the  earliest  possible  time  and  shall 
take  precedence  of  all  matters  except  older  matters  of  the  same 
character ;  and  when  the  same  comes  up  for  hearing  the  party 
obtaining  the  temporary  restraining  order  shall  proceed  with 
the  application  for  a  preliminary  injunction,  and  if  he  does  not 
do  so  the  court  shall  dissolve  the  temporary  restraining  order. 
Upon  two  days'  notice  to  the  party  obtaining  such  temporary 
restraining  order  the  opposite  party  may  appear  and  move  the 
dissolution  or  modification  of  the  order,  and  in  that  event  the 
court  or  judge  shall  proceed  to  hear  and  determine  the  motion 
as  expeditiously  as  the  ends  of  justice  may  require. 

Section  two  hundred  and  sixty-three  of  an  Act  entitled  "An 
Act  to  codify,  revise,  and  amend  the  laws  relating  to  the  judici- 
ary," approved  March  third,  nineteen  hundred  and  eleven,  is 
hereby  repealed. 

Nothing  in  this  section  contained  shall  be  deemed  to  alter,  re- 
peal, or  amend  section  two  hundred  and  sixty-six  of  an  Act  entitled 
"  An  Act  to  codify,  revise,  and  amend  the  laws  relating  to  the 
judiciary,"  approved  March  third,  nineteen  hundred  and  eleven. 

Sec.  1 8.  That,  except  as  otherwise  provided  in  section  six- 
teen of  this  Act,  no  restraining  order  or  interlocutory  order  of 
injunction  shall  issue,  except  upon  the  giving  of  security  by  the 
applicant  in  such  sum  as  the  court  or  judge  may  deem  proper, 
conditioned  upon  the  payment  of  such  costs  and  damages  as 
may  be  incurred  or  suffered  by  any  party  who  may  be  found  to 
have  been  wrongfully  enjoined  or  restrained  thereby. 


AMENDMENT   OF   THE   SHERMAN    ACT,    1914        731 

Sec.  19.  That  every  order  of  injunction  or  rcstnuning  order 
shall  set  forth  the  reasons  for  the  issuance  of  the  same,  shall  be 
specific  in  terms,  and  shall  describe  in  reasonable  detail,  and 
not  by  reference  to  the  bill  of  complaint  or  other  document,  the 
act  or  acts  sought  to  be  restrained,  and  shall  be  binding  only 
upon  the  parties  to  the  suit,  their  officers,  agents,  servants,  em- 
ployees, and  attorneys,  or  those  in  active  concert  or  participat- 
ing with  them,  and  who  shall,  by  personal  service  or  otherwise, 
have  received  actual  notice  of  the  same. 

Sec.  20.  That  no  restraining  order  or  injunction  shall  be 
granted  by  any  court  of  the  United  States,  or  a  judge  or  the 
judges  thereof,  in  any  case  between  an  employer  and  employees, 
or  between  employers  and  employees,  or  between  employees, 
or  between  persons  employed  and  persons  seeking  employment, 
involving,  or  growing  out  of,  a  dispute  concerning  terms  or  con- 
ditions of  employment,  unless  necessary  to  prevent  irreparable 
injury  to  property,  or  to  a  property  right,  of  the  party  making 
the  application,  for  which  injury  there  is  no  adequate  remedy 
at  law,  and  such  property  or  property  right  must  be  described 
with  particularity  in  the  application,  which  must  be  in  writing 
and  sworn  to  by  the  applicant  or  by  his  agent  or  attorney. 

And  no  such  restraining  order  or  injunction  shall  prohibit  any 
person  or  persons,  whether  singly  or  in  concert,  from  terminat- 
ing any  relation  of  employment,  or  from  ceasing  to  perform  any 
work  or  labor,  or  from  recommending,  advising,  or  persuading 
others  by  peaceful  means  so  to  do;  or  from  attending  at  any 
place  where  any  such  person  or  persons  may  lawfully  be,  for 
the  purpose  of  peacefully  obtaining  or  communicating  informa- 
tion, or  from  peacefully  persuading  any  person  to  work  or  to 
abstain  from  working ;  or  from  ceasing  to  patronize  or  to  em- 
ploy any  party  to  such  dispute,  or  from  recommending,  advis- 
ing, or  persuading  others  by  peaceful  and  lawful  means  so  to 
do ;  or  from  paying  or  giving  to,  or  withholding  from,  any  per- 
son engaged  in  such  dispute,  any  strike  benefits  or  other  moneys 
or  things  of  value ;  or  from  peaceably  assembling  in  a  lawful 
manner,  and  for  lawful  purposes ;  or  from  doing  any  act  or 
thing  which  might  lawfully  be  done  in  the  absence  of  such  dis- 
pute by  any  party  thereto  ;  nor  shall  any  of  the  acts  specified 


732  TRUSTS,   POOLS   AND   CORPORATIONS 

in  this  paragraph  be  considered  or  held  to  be  violations  of  any 
law  of  the  United  States. 

Sec.  21.  That  any  person  who  shall  willfully  disobey  any 
lawful  writ,  process,  order,  rule,  decree,  or  command  of  any 
district  court  of  the  United  States  or  any  court  of  the  District 
of  Columbia  by  doing  any  act  or  thing  therein,  or  thereby  for- 
bidden to  be  done  by  him,  if  the  act  or  thing  so  done  by  him 
be  of  such  character  as  to  constitute  also  a  criminal  offense 
under  any  statute  of  the  United  States,  or  under  the  laws  of  any 
State  in  which  the  act  was  committed,  shall  be  proceeded  against 
for  his  said  contempt  as  hereinafter  provided. 

Sec.  22.  That  whenever  it  shall  be  made  to  appear  to  any 
district  court  or  judge  thereof,  or  to  any  judge  therein  sitting, 
by  the  return  of  a  proper  officer  on  lawful  process,  or  upon  the 
affidavit  of  some  credible  person,  or  by  information  filed  by  any 
district  attorney,  that  there  is  reasonable  ground  to  believe  that 
any  person  has  been  guilty  of  such  contempt,  the  court  or  judge 
thereof,  or  any  judge  therein  sitting,  may  issue  a  rule  requiring 
the  said  person  so  charged  to  show  cause  upon  a  day  certain 
why  he  should  not  be  punished  therefor,  which  rule,  together 
with  a  copy  of  the  affidavit  or  information,  shall  be  served  upon 
the  person  charged,  with  sufficient  promptness  to  enable  him  to 
prepare  for  and  make  return  to  the  order  at  the  time  fixed 
therein.  If  upon  or  by  such  return,  in  the  judgment  of  the 
court,  the  alleged  contempt  be  not  sufficiently  purged,  a  trial 
shall  be  directed  at  a  time  and  place  fixed  by  the  court :  Pro- 
vided, /lowever,  That  if  the  accused,  being  a  natural  person,  fail 
or  refuse  to  make  return  to  the  rule  to  show  cause,  an  attach- 
ment may  issue  against  his  person  to  compel  an  answer,  and  in 
case  of  his  continued  failure  or  refusal,  or  if  for  any  reason  it  be 
impracticable  to  dispose  of  the  matter  on  the  return  day,  he 
may  be  required  to  give  reasonable  bail  for  his  attendance  at  the 
trial  and  his  submission  to  the  final  judgment  of  the  court. 
Where  the  accused  is  a  body  corporate,  an  attachment  for  the 
sequestration  of  its  property  may  be  issued  upon  like  refusal  or 
failure  to  answer. 

In  all  cases  within  the  purview  of  this  Act  such  trial  may  be 
by  the  court,  or,  upon  demand  of  the  accused,  by  a  jury;  in 


AMENDMENT   OF   THE   SMERMAN    ACT,    1914        733 

which  latter  event  the  court  may  impanel  a  jury  fr(5tH' the  jurors 
then  in  attendance,  or  the  court  or  the  judge  thereof  in  chambers 
may  cause  a  sufficient  number  of  jurors  to  be  selected  and  sum- 
moned, as  provided  by  law,  to  attend  at  the  time  and  place  of 
trial,  at  which  time  a  jury  shall  be  selected  and  impaneled  as 
upon  a  trial  for  misdemeanor;  and  such  trial  shall  conform,  as 
near  as  may  be,  to  the  practice  in  criminal  cases  prosecuted 
by  indictment  or  upon  information. 

If  the  accused  be  found  guilty,  judgment  shall  be  entered 
accordingly,  prescribing  the  punishment,  either  by  fine  or  impris- 
onment, or  both,  in  the  discretion  of  the  court.  Such  fine  shall 
be  paid  to  the  United  States  or  to  the  complainant  or  other 
party  injured  by  the  act  constituting  the  contempt,  or  may, 
where  more  than  one  is  so  damaged,  be  divided  or  apportioned 
among  them  as  the  court  may  direct,  but  in  no  case  shall  the 
fine  to  be  paid  to  the  United  States  exceed,  in  case  the  accused 
is  a  natural  person,  the  sum  of  $1,000,  nor  shall  such  imxprison- 
ment  exceed  the  term  of  six  months :  Provided^  That  in  any 
case  the  court  or  a  judge  thereof  may,  for  good  cause  shown, 
by  affidavit  or  proof  taken  in  open  court  or  before  such  judge 
and  filed  with  the  papers  in  the  case,  dispense  with  the  rule  to 
show  cause,  and  may  issue  an  attachment  for  the  arrest  of  the 
person  charged  with  contempt;  in  which  event  such  person, 
when  arrested,  shall  be  brought  before  such  court  or  a  judge 
thereof  without  unnecessary  delay  and  shall  be  admitted  to  bail 
in  a  reasonable  penalty  for  his  appearance  to  answer  to  the 
charge  or  for  trial  for  the  contempt ;  and  thereafter  the  pro- 
ceedings shall  be  the  same  as  provided  herein  in  case  the  rule 
had  issued  in  the  first  instance. 

Sec.  23.  That  the  evidence  taken  upon  the  trial  of  any  per- 
sons so  accused  may  be  preserved  by  bill  of  exceptions,  and  any 
judgment  of  conviction  may  be  reviewed  upon  writ  of  error  in 
all  respects  as  now  provided  by  law  in  criminal  cases,  and  may 
be  affirmed,  reversed,  or  modified  as  justice  may  require.  Upon 
the  granting  of  such  writ  of  error,  execution  of  judgment  shall 
be  stayed,  and  the  accused,  if  thereby  sentenced  to  imprison- 
ment, shall  be  admitted  to  bail  in  such  reasonable  sum  as  may 
be  required  by  the  court,  or  by  any  justice,  or  any  judge  of  any 


734  TRUSTS,    POOLS  AND  CORPORATIONS 

district  court  of  the  United  States  or  any  court  of  the  District 
of  Columbia. 

Sec.  24.  That  nothing  herein  contained  shall  be  construed  to 
relate  to  contempts  committed  in  the  presence  of  the  court,  or 
so  near  thereto  as  to  obstruct  the  administration  of  justice,  nor 
to  contempts  committed  in  disobedience  of  any  lawful  writ, 
process,  order,  rule,  decree,  or  command  entered  in  any  suit  or 
action  brought  or  prosecuted  in  the  name  of,  or  on  behalf  of, 
the  United  States,  but  the  same,  and  all  other  cases  of  contempt 
not  specifically  embraced  within  section  twenty-one  of  this  Act, 
may  be  punished  in  conformity  to  the  usages  at  law  and  in 
equity  now  prevailing. 

Sec.  25.  That  no  proceeding  for  contempt  shall  be  instituted 
against  any  person  unless  begun  within  one  year  from  the  date 
of  the  act  complained  of ;  nor  shall  any  such  proceeding  be  a 
bar  to  any  criminal  prosecution  for  the  same  act  or  acts ;  but 
nothing  herein  contained  shall  affect  any  proceedings  in  con- 
tempt pending  at  the  time  of  the  passage  of  this  Act. 

Sec.  26.  If  any  clause,  sentence,  paragraph,  or  part  of  this 
Act  shall,  for  any  reason,  be  adjudged  by  any  court  of  competent 
jurisdiction  to  be  invalid,  such  judgment  shall  not  affect,  impair, 
or  invahdate  the  remainder  thereof,  but  shall  be  confined  in  its 
operation  to  the  clause,  sentence,  paragraph,  or  part  thereof 
directly  involved  in  the  controversy  in  which  such  judgment 
shall  have  been  rendered. 

Approved,  October  15,  1914. 


XX 

THE    LAW   CONCERNING    MONOPOLISTIC   COMBI- 
NATIONS   IN    CONTINENTAL   EUROPEi 

THE  problem  of  monopolistic  combinations  in  industry  is  of 
world-wide  character,  but  the  law  respecting-  them  differs 
greatly  in  the  most  important  states.  These  differences  arise 
partly  from  various  historical  circumstances  of  social  and  legal 
development,  but  they  are  also  due  to  different  views  as  to  the 
significance  of  such  combinations  and  the  attitude  that  the  state 
should  assume  towards  them  with  respect  to  both  public  and 
private  interests. 

Industrial  combinations  are  by  no  means  purely  modern  phe- 
nomena, and  the  jurisprudence  of  Europe  in  ancient  as  well  as  in 
modern  times  has  addressed  itself  to  the  question  of  their  pro- 
priety and  legality.  In  the  early  empire,  for  example,  the  law 
made  the  cornering  and  engrossing  of  grain  a  criminal  offense, 
and  threatened  the  same  with  penalties  varying  from  a  denial  of 
trading  privileges  to  banishment  and  public  labor»  A  law  of 
Zeno,  under  the  later  empire,  forbade  under  penalty  of  a  heavy 
fine  all  combinations  whereby  it  was  agreed  that  a  commodity 
should  not  be  sold  below  a  certain  price.  A  similar  policy  was 
followed  in  the  middle  ages  by  the  emperors  of  the  Holy  Roman 
Empire,  and  by  the  kings  of  France,  and  to  their  influence  can 
be  traced  some  of  the  provisions  of  modern  European  codes. 

The  course  of  development  in  modern  states  has  not  only 
differed  widely,  but  in  the  same  state,  at  different  periods,  the 
changing  views  of  political  and  social  philosophy  have  been 
reflected  in  the  law.  A  remarkable  illustration  of  the  effect  of 
new  ideas  is  seen  in  the  legislation  of  the  French  Revolution, 
and  notably  in  the  law  which  forbade  all  associations  in  the  form 
known  to  the  French  law  as  "corporations"  {i.e.  guilds  or  as- 

1  Political  Science  Quarterly,  Vol.  XX,  1905,  pp.  13-41.  Elaborate  footnotes  and 
references  to  cases  are  omitted  for  lack  of  space. 

735 


736  TRUSTS,    POOLS   AND   CORPORATIONS 

sociations  of  persons  in  the  same  trade)  on  account  of  the  odious 
monopoHes  which  they  had  estabHshed  under  the  ancicn  regime. 
Another  illustration  of  more  historical  importance,  and  resting 
on  deeper  rooted  ideas  of  social  policy,  is  found  in  the  nineteenth 
century  movement  towards  industrial  freedom  which  has  brought 
about  the  abolition  of  laws  prohibiting  employers  and  wage- 
earners  from  combining  with  respect  to  labor  contracts.  In  this 
matter,  indeed,  the  policies  of  modern  states,  following  a  strong 
democratic  tendency,  have  shown  more  consistency  than  with 
respect  to  combinations  to  control  production  and  prices.  It  is 
with  this  last  question  that  we  are  here  concerned. 

The  evolution  and  present  condition  of  combinations  in  Europe 
is  quite  beyond  the  scope  of  this  discussion ;  it  is  sufficient  to  say 
that,  taking  the  continent  as  a  whole,  industrial  combinations 
seem  quite  as  numerous  as  in  America  and  in  some  countries  they 
are  highly  developed.  They  are  usually  called  cartells.  The 
European  cartell  corresponds  to  an  American  pool,  but  it  is 
generally  more  highly  organized.  Consolidated  organizations 
of  business — trusts,  fusions,  mergers,  etc.  —  are  rarely  found. 

The  conditions  of  space  and  material  make  it  necessary  to  con- 
fine the  discussion  of  the  law  to  the  chief  industrial  countries  of 
continental  Europe,  viz.,  Germany,  Austria,  and  France,  although 
brief  references  will  be  made  to  certain  others.  For  these  three 
states  it  is  possible  to  make  a  fairly  complete  statement  of  the 
law,  although  no  attempt  will  be  made  to  enter  into  the  minute 
distinctions  of  legal  interpretation  nor  to  give  an  exhaustive  digest 
of  the  cases.  One  phase  of  the  subject,  the  regulation  of  compe- 
tition in  bidding  on  public  contracts,  will  be  omitted  entirely. 

The  law  can  be  most  conveniently  examined  and  clearly  under- 
stood by  taking  each  country  separately,  considering,  first,  the 
criminal  law,  and,  second,  the  civil  law,  and  examining  under 
each  {a)  legislation,  {b)  judicial  decisions  and  {c)  comment  of 
jurists. 

I.    The  German  Empire 

The  law  of  the  German  Empire  is  of  special  interest  for  two 
reasons  :  first,  because  the  new  code  represents  the  latest  effort 
of  scientific  jurisprudence  and,  second,  because  it  was  established 


LAWS  CONCERNING  MONOPOLY   IN   EUROPE       737 

at  a  time  when  industrial  combinations  had  reached  a  high  stage 
of  development  in  that  country  and  had  attracted  the  attention 
of  statesmen  and  jurists. 

The  German  criminal  code  contains  no  prohibition  against 
cartells  nor  any  law  specially  concerning  them.  A  good  many 
offenses  under  the  criminal  law  might,  of  course,  be  committed 
by  cartells.  A  case  of  some  interest  occurred  recently  under  the 
article  of  the  criminal  code  which  prohibits  extortion.  A  powder 
manufacturing  combination  refused  to,  supply  dealers  who  did 
not  buy  exclusively  of  them.  One  of  tlieir  cusiomcrs  purchased 
supplies  from  an  outsider  and  was  threatened  in  consequence 
with  a  discontinuance  of  supply..  The  imperial  court  condemned 
this  as  contrary  to  the  law, 

The  provisions  of  the  civil  law  in  Germany  are  much  more  im- 
portant with  respect  to  cartells  than  those  of  the  criminal  law, 
but  here  also  nothing  is  to  be  found  preventing  their  estabhsh- 
ment  The  civil  law  implicitly  recognizes  the  validity  of  cartell 
contracts,  because  it  establishes  the  general  principle  of  freedom 
of  contract,  without  making  any  exception  of  cartell  contracts. 
Cartells  have  been  attacked,  nevertheless,  in  the  courts,  both 
under  the  industrial  code  and  under  the  civil  code. 

The  industrial  code  {Gewerbeordiumg)  establishes  the  general 
principle  of  free  industry  in  its  first  section,  which  reads  :  "  The 
pursuit  of  an  industry  is  permitted  to  everyone,  in  so  far  as  ex- 
ceptions or  limitations  are  not  imposed  or  permitted  in  the  ]3resent 
law."  The  interpretation  of  this  section  goes  back  to  the  begin- 
ning of  the  activity  of  the  German  imperial  court.  The  earlier 
cases  were  regarding  such  restraints  on  the  freedom  of  industry 
as  are  contained  in  contracts  to  abstain  from  engaging  in  a 
certain  business  under  certain  conditions  of  time  and  space.  In 
a  case  decided  in  1880  the  court  said  :  "  The  industrial  code  does 
not  aim  to  limit  the  freedom  of  contract  to  any  greater  extent 
than  is  required  in  the  interest  of  the  public."  In  1890  a  case 
came  before  the  imperial  court  concerning  the  relations  of  a  pub- 
lishers' and  booksellers'  cartell  with  an  outsider,  against  whom 
certain  discriminations  had  been  made  on  account  of  rate-cutting. 
The  cartell  was  attacked  as  an  infringement  of  the  principle  of 
free  industry.     The  court,  however,  denied  this  and  said  in  part : 


738  TRUSTS,    POOLS  AND   CORPORATIONS 

From  the  principal  of  industrial  liberty  it  does  not  follow  that  there 
must  be  no  interference  with  the  free  play  of  economic  forces,  in  the 
sense  that  persons  engaged  in  an  industry  should  be  prohibited  from 
endeavoring  in  the  way  of  associated  self-help  to  regulate  the  activity 
of  these  forces  and  to  prevent  excesses  that  are  deemed  injurious. 

The  most  important  decision  of  all  was  in  the  case  of  the  Saxon 
wood  pulp  cartell  in  1897.  In  this  the  court  declared  that  a 
cartell  was  not  only  not  contrary  to  the  principle  of  free  industry 
but  was  often  in  the  interest  of  the  public  as  well  as  of  the  mem- 
bers of  the  cartell.  As  regarded  the  claim  that  the  cartell  was 
contrary  to  the  principle  of  industrial  liberty,  the  court  said< 

This  objection  cannot,  however,  be  regarded  as  well  founded.  The 
association  which  appears  in  this  case  as  plaintiff  was  established,  as 
is  expressly  stated  in  its  statutes  and  is  not  disputed  in  the  pleadings, 
in  order  to  prevent  in  the  future  a  destructive  competition  between  the 
Saxon  wood  pulp  manufacturers,  and  to  make  possible  the  attainment 
of  higher  prices  than  could  be  gotten  with  unrestricted  competition. 

After  noting  that  associations  for  such  a  purpose  are  often  re- 
garded, "especially  outside  of  Germany,"  as  violating  the  prin- 
ciple of  industrial  liberty  and  the  pubUc  interest  which  that 
principle  aims  to  further,  the  court  continued : 

If  in  any  branch  of  industry  the  prices  of  the  products  sink  too  low, 
and  the  thriving  operation  of  the  industry  is  thereby  made  impossible 
or  endangered,  then  the  crisis  which  occurs  is  destructive  not  only  to 
the  individuals  but  also  to  the  social  economy  in  general,  and  it  lies 
therefore  in  the  interest  of  the  whole  community  that  immoderately 
low  prices  shall  not  exist  permanently  in  any  industry. 

Hence  the  court  concluded  that  cartells  are  not  improper  in 
principle,  but  it  indicated  that  this  conclusion  does  not  justify 
them  absolutely  in  all  cases. 

To  contracts  of  the  kind  under  consideration,  therefore,  exception 
can  be  taken  from  the  standpoint  of  the  protection  of  the  general  in- 
terests through  industrial  freedom  only  if  in  individual  cases  objections 
arise  from  particular  circumstances,  especially  if  there  is  an  evident 
purpose  of  establishing  an  actual  monopoly  and  of  effecting  an  usurious 
exploitation  of  the  consumers,  or  if  these  consequences  are  actually 
brought  about  by  the  agreements  and  arrangements  made. 


LAWS  CONCERNING   MONOPOLY   IN    EUROPE       739 

This  last  statement  is  of  especial  interest,  because  it  shows 
that  the  court  recognizes  at  least  a  theoretical  limit  to  the  free- 
dom of  combination.  This  limitation,  however,  does  not  seem 
to  have  any  great  practical  value,  inasmuch  as  there  are  various 
cartells  which  have  organized  a  practical  monopoly  and  have 
pursued  what  may  be  fairly  termed  extortionate  price  policies, 
in  the  face  of  bitter  complaint  and  against  litigious  parties,  with- 
out the  legality  of  their  constitution  being  called  in  question. 

It  appears,  therefore,  from  the  uniform  judgments  of  the  im- 
perial court  that  the  cartells  are  not  regarded  as  infringing  the 
principle  of  industrial  liberty. 

Under  the  civil  code  the  cartell  contracts  have  likewise  been 
declared  lawful.  There  are  only  two  articles  of  interest  here, 
which  reads  as  follows : 

Art.  138.     A  jural  act  that  is  repugnant  to  morality  is  void. 

Art.  826.  Whoever,  in  a  manner  repugnant  to  morality,  intention- 
ally inflicts  an  injury  upon  another  is  bound  to  such  other  for  com- 
pensation of  the  injury. 

It  does  not  appear  that  any  efforts  have  been  made  to  attack 
the  vaHdity  of  cartell  contracts  under  the  first  of  the  above 
sections  (138),  but  decision  was  rendered  on  the  same  point  of 
law  in  a  number  of  cases  before  the  present  code  went  into 
effect.  An  early  cartell  case  was  decided  in  the  highest  Bavarian 
court  {obcrstes  LandgericJit)  in  Munich,  April  7,  1888.  In  this 
case  the  court  declared  that  a  cartell  contract  of  certain  tile 
manufacturers  to  limit  production  and  fix  minimum  prices  was 
not  only  valid,  but  also  a  prudent  business  arrangement.  The 
court  denied  that  either  the  aim  or  the  means  adopted  in  such 
an  agreement  was  contra  bonos  mores. 

Of  much  greater  importance,  because  decided  in  the  imperial 
court,  was  the  case  of  the  book  publishers'  cartell  referred  to 
above.  It  was  claimed  that  this  cartell  was  contrary  to  good 
morals  and  public  order.  The  court  said  that  such  a  point  of 
view  might  be  relevant,  if  it  were  shown  that  a  combination  had 
been  formed  to  control  the  market  and  to  check  the  free  play  of 
economic  forces  for  speculative  purposes,  but  went  on  to  say : 

A  complete  distinction  should  be  drawn  between  such  combinations 
and  associations  of  fellow  craftsmen  for  the  purpose,  pursued  in  good 


740  TRUSTS,    POOLS   AND    CORPORATIONS 

faith,  of  maintaining  an  industry  on  a  living  basis  through  protection 
against  depreciation  of  products  and  against  other  disadvantages  aris- 
ing from  the  price  cutting  of  individuals. 

The  other  article  of  the  civil  code  (826)  cited  above  might 
have  some  apphcation  to  the  malpractices  of  cartells,  but  not  to 
their  legal  existence.  A  case  came  up  recently  wherein  a  steam- 
ship hne  tried  to  force  a  competing  line  out  of  a  certain  trade  by 
refusing  to  take  freight  at  the  ordinary  rates  from  one  of  its  large 
shippers  if  he  continued  to  patronize  the  competing  line.  The 
injured  shipper  brought  suit  to  compel  the  steamship  hne  to 
desist  from  such  action.  The  claim  of  the  plaintiff  was  sustained 
in  the  court  of  first  instance,  denied  on  appeal,  but  again  sus- 
tained in  the  imperial  court.  The  imperial  court  said,  in 
part : 

Article  826  is  adapted  and  also  intended  by  the  legislator  to  establish 
a  protection  against  unfair  treatment  in  a  comprehensive  manner, 
particularly  for  business  intercourse,  in  so  far  as  provision  is  not 
made  through  special  laws. 

The  court  suggested  that  an  action  for  extortion  might  lie. 
It  also  pointed  out  that  the  obligation  of  a  common  carrier 
( Transportzwang)  was  estabhshed  in  Germany  for  railway  trans- 
portation only,  not  for  other  land  carriage,  nor  for  sea  carriage ; 
and  suggested  that  such  a  compulsion  might  appear  to  be  neces- 
sary, especially  against  enterprises  which  subserved  a  public 
interest  and  which  possessed,  legally  or  de  facto,  a  monopoly  of 
such  service.  Meanwhile,  even  in  the  absence  of  any  legal  duty 
to  render  the  service,  the  arbitrary  and  unfair  refusal  of  trans- 
portation at  the  ordinary  rates  was  to  be  regarded  as  an  action 
contra  bonos  mores.  As  a  standard  of  morals  within  the  mean- 
ing of  article  826,  the  court  accepted  the  sense  of  propriety 
(yAnstandsgefiiJil),  of  right-minded  persons,  and  in  commercial 
matters  the  views  and  sentiments  of  honorable  business  men. 

Although  this  case  had  no  direct  relation  to  the  cartells,  the 
position  taken  by  the  court  is  of  much  interest  as  showing  its 
attitude  towards  monopolfes  an^  towards  practices  in  which  car- 
tels are  frequent  offenders.^ 

In  this  connection  may  be  noticed  again  the  case  of  the  book 


LAWS   CONCERNING   MONOPOLY   IN    EUROPE       741 

publishers'  cartell.  The  court  denied  the  claim  of  tlie  plaintiffs 
to  damages  from  the  cartell  upon  the  ground  that  the  record 
showed  no  injury,  but  it  did  not  decide  whether  the  means  used 
by  the  cartell  against  outsiders,  viz.,  total  exclusion  from  supply 
of  books,  refusal  to  furnish  the  trade  journal  or  to  publish  adver- 
tisements therein,  denial  of  certain  rebates  and  the  publication 
of  a  black  list  in  the  trade  journal,  were  unlawful  or  not,  al- 
though it  intimated  that  they  were  not  lawful. 

The  courts  have  not  only  refused  to  declare  cartell  contracts 
illegal,  but  they  have  also  expressly  declared  them  valid,  includ- 
ing the  penalty  clauses  embraced  therein  for  violation  of  such 
agreements.  Thus,  in  the  above  cited  Saxon  wood  pulp  cartell, 
the  refusal  to  pay  the  conventional  fines  was  declared  a  breach 
of  a  lawful  engagement.  This  decision  was  made  before  the 
code  in  its  present  form  went  into  effect,  but  the  same  principles 
were  applied  as  in  the  recent  case  regarding  the  interpretation 
of  the  agreement  of  the  coal  syndicate.  Speaking  of  this 
agreement  the  court  said  :  "  against  the  validity  of  which  well- 
founded  objections  do  not  exist."  The  court  declared  that  the 
Hannibal  mine  must  perform  its  obligations  under  the  agree- 
ment, or  pay  damages.  A  still  more  recent  case,  in  which  the 
validity  of  a  cartell  agreement  was  involved,  concerned  the 
right  of  a  member  to  withdraw.  The  court  held  the  agreement 
to  be  a  valid  one,  but  declared  that  a  member  might  withdraw 
in  case  the  other  parties  made  the  proper  fulfilment  of  the  con- 
tract impossible. 

In  the  opinions  of  jurists  may  be  found  some  useful  criticism 
of  the  meaning  and  possibilities  of  the  present  law.  The  sub- 
ject was  considered  with  much  minuteness  in  the  twenty-sixth 
convention  of  the  German  jurists  in  1902,  and  was  again  under 
consideration  at  their  recent  meeting  in  the  autumn  of  1904. 
One  of  the  prominent  speakers  in  the  convention  in  1902 
declared  that  the  existing  law  was  sufficient  to  prevent  objec- 
tionable practices,  i.e.  associations  aiming  at  monopoly  could  be 
attacked  at  their  establishment  under  article  138,  and  in  their 
operation  under  article  826.  Landesberger  expressed  the  opin- 
ion that  it  was  possible  to  test  the  validity  of  cartell  contracts 
generally    under   article   138,   and  supported  his  opinion  by  a 


742  TRUSTS,   POOLS   AND   CORPORATIONS 

citation  from  the  opinion  of  the  imperial  court  in  the  Saxon 
wood  pulp  manufacturers'  case.     He  said: 

I  do  not  hold  it  [article  138]  as  totally  inapplicable.  Cartell  agree- 
ments and  cartell  resolutions  of  a  directly  usurious  character  or  acts 
done  in  the  execution  of  cartell  resolutions  which  were  demonstrably 
intended  to  ruin  an  outsider,  might  well  be  characterized  as  contra 
bonos  mores.  •  1 

He  confessed  that  in  any  case  the  article  was  applicable  only  in 
a  very  limited  range  of  cases.  (Rundstein  takes  a  somewhat 
similar  position,  holding  that  article  138  would  apply,  if  cartells 
possessing  a  monopoly  were  guilty  of  exploiting  the  public,  or  if 
it  could  be  proved  that  they  intended  to  do  so.)  Boyens  thought 
that  a  cartell  contract  that  did  not  provide  a  fair  arrange- 
ment between  the  members  —  one,  for  example,  that  gave  the 
large  members  too  much  power  over  the  small  members  — 
might  be  contra  bonos  mores  in  the  sense  of  article  138.  It  is 
interesting  to  observe  that  the  original  draft  of  article  138  had  a 
wider  scope,  invalidating  not  only  jural  acts  that  were  repugnant 
to  morality,  but  also  such  as  were  repugnant  to  public  order. 

A  good  deal  of  hope,  in  a  small  way,  appears  to  be  put  in  the 
provisions  of  article  826.  For  example,  Juliusberg  thinks  that 
boycotting  and  usurious  exploitation  through  exorbitant  prices 
may  be  made  a  ground  of  action  for  damages  under  this  article. 
Boyens  claims  that  intentional  underbidding,  with  the  aim  of 
preventing  a  competitor  from  working  without  loss,  or  of  com- 
pelUng  him  to  enter  a  cartell,  may  be  attacked  under  this  article 
as  an  effort  to  cause  damage  to  another  in  an  immoral  fashion, 
and  that  such  proceedings  may  be  contested  both  preventively 
and  repressively.  For  these  reasons,  also,  a  cartell  might  be 
declared  invalid.  Menzel,  on  the  other  hand,  thinks  that  article 
826  is  of  little  practical  significance  in  opposing  cartell  excesses, 
because  a  judgment  can  seldom  be  obtained  on  account  of  the 
difficulty  of  proving  malice  {do his). 

II.    Austria 

In  no  important  industrial  country  in  Europe  are  the  laws 
less  favorable  to  industrial  combinations  than  in  Austria,  but  in 


LAWS   CONCERNING   MONOPOLY   IN    EUROPE       743 

hardly  any  other  country  are  such  combinations  more  numerous. 
The  laws  concerning  them  were  established  at  a  period  before 
they  had  acquired  the  significance  that  they  possess  to-day,  and 
the  appHcation  of  these  older  laws  to  cartell  agreements  has 
been  sometimes  disputed.  The  policy  of  the  Austrian  govern- 
ment has  tended  recently  to  increase  the  restrictions  placed  on 
combinations,  but  the  legislative  projects  in  this  direction  have 
not  been  enacted  into  law. 

There  are  no  penal  laws  against  industrial  combinations. 
The  penal  code  of  1852,  which  in  general  is  still  in  force,  pro- 
vided that  "agreements  of  persons  engaged  in  industry  [_Ge- 
werbsleHte\  manufacturers  [etc.]  ...  to  raise  the  price  of  a 
commodity  ...  to  the  disadvantage  of  the  public  or  to  reduce  the 
same  to  their  own  advantage  or  to  cause  a  scarcity,"  should  be 
punished  as  misdemeanors.  The  provisions  of  this  section  were 
abrogated  by  the  law  of  April  7,  1870,  which  declared  that  such 
agreements  should  be  deemed  repugnant  to  the  penal  law  only 
in  case  intimidation  or  force  were  used.  The  Austrian  crimi- 
nal law,  therefore,  now  contains  no  provisions  specially  appli- 
cable to  cartells. 

It  should  be  noted,  however,  that  while  the  law  of  April  7, 
1870,  abolished  the  penalties  previously  imposed  on  industrial 
combinations,  it  did  not  legalize  them  from  the  point  of  view  of 
the  civil  law.  On  the  contrary,  article  2  of  the  law  of  1870 
declares  that  certain  agreements  concerning  the  giving  or  taking 
of  employment,  etc.,  "  have  no  legal  operation."  Article  4 
declares :  "  The  provisions  contained  in  articles  i  and  2  have 
application  also  to  agreements  of  persons  engaged  in  industry 
\Gezvcrhsleute^  with  the  purpose  of  raising  the  price  of  a  com- 
modity to  the  disadvantage  of  the  public." 

The  law  of  1870,  therefore,  made  industrial  combinations 
void,  but,  on  account  of  the  character  of  the  law  of  procedure 
existing  before  1895,  this  declaration  of  the  statute  could  be 
evaded,'  for  most  practical  purposes,  by  providing  that  any 
matters  of  dispute  in  regard  to  the  obligations  of  the  parties  to 
the  agreement  should  be  submitted  to  a  private  board  of  arbitra- 
tion, established  by  the  said  agreement.  According  to  the  law 
of  procedure  existing  before  1895,  the  decisions  of  such  an  arbi- 


744  TRUSTS,    POOLS  AND   CORPORATIONS 

tration  were  binding  and  could  be  annulled  in  the  courts  only  in 
case  of  open  fraud.  The  law  of  procedure  was  altered  in  1895 
by  the  introduction  of  a  new  code,  which  declares  that  the  deci- 
sions of  a  private  court  of  arbitration  are  inoperative  "if  repugnant 
to  compulsory  rules  of  law,"  and  it  is  provided  that  parties  cannot 
lawfully  renounce  their  right  of  appeal  to  the  courts  in  such  cases. 

There  have  been  some  important  judicial  decisions  in  Austria 
respecting  the  validity  of  cartell  agreements,  interpreting  the  law 
of  1870.  It  is  remarkable  that  no  cases  came  up  for  decision 
until  within  the  last  decade,  and  after  Professor  Menzel  had 
pointed  out  its  application  in  his  celebrated  discussion  of  the  sub- 
ject before  the  Verein  fiir  Sozial-Politik  in  1894. 

The  first  cartell  case  to  be  decided  was  with  respect  to  a 
cartell  of  oleum  producers,  which  had  been  organized  in  1887  for 
a  limited  period  for  the  regulation  of  the  sale  of  oleum,  chiefly, 
though  not  exclusively,  in  the  export  trade.  A  suit  was  brought 
for  damages  for  breach  of  the  terms  of  the  agreement,  and  the 
defense  was  made  that  the  contract  was  invalid  under  the  law  of 
1870.  The  supreme  court  {oberster  GericJitsJiof^  held  that  the 
agreement  was  invalid,  and  denied  the  claim  for  compensation. 
The  court  said  :  "  The  plaintiff  objects,  with  justice,  that  such  an 
agreement  is  without  legal  operation."  The  decision  of  the 
court  depended  largely  on  verbal  definitions.  The  word  "  Ge- 
werbsleute''  was  held  to  include  every  industrial  producer,  and 
the  word  ^^  Gewerbe'"  was  held  to  be  applicable  to  factory  pro- 
duction as  well  as  to  handicraft.  Popular  use,  it  seems,  had 
come  to  restrict  "  Gewcrbe  "  to  the  form  of  industry  practiced  by 
petty  craftsmen  and  artisans,  but  the  court  pointed  out  that  the 
term  was  used  in  various  laws  to  embrace  factory  industry  and 
that  there  was  no  reason  to  suppose  that  the  legislator  intended 
to  protect  the  public  against  the  extortion  of  handicraftsmen 
only.  The  court  also  held  that  proof  of  the  advance  of  prices 
was  not  necessary,  and  that  a  limitation  of  the  agreement  in 
respect  to  the  area  or  term  of  operation  did  not  make  it  lawful. 

Another  cartell  case  came  before  the  supreme  court  of  Austria 
in  the  following  year  (1899)  concerning  a  combination  among 
the  talc  producers  {Federwcisscartcll )  of  Styria,  which  had  estab- 
lished a  central  selling  bureau  in  Vienna  for  a  term  of  five  years. 


LAWS   CONCERNING    MONOPOLY    IN    EUROPE       745 

Conventional  penalties  were  provided  for  breacli  of  th^agreement. 
A  firm  which  was  a  member  of  tiie  cartell  brought  an  action  to 
obtain  a  judgment  that  its  contract  under  the  cartell  agreement 
was  invalid,  but  this  claim  was  rejected  in  the  local  and  provin- 
cial courts.  The  supreme  court  took  the  same  view  as  in  the 
case  noticed  above,  and  declared  the  compact  void.  In  regard 
to  prices  the  court  said  that  it  was  not  necessary  to  prove  that 
there  had  been  an  advance  of  the  same  to  the  disadvantage  of 
the  public,  but  that  the  intent  to  raise  prices  could  be  deduced 
from  the  nature  of  the  agreement.  Such  an  indication  of  intent 
appeared  in  provisions  for  the  limitation  of  output  or  for  the 
regulation  of  prices  by  a  central  bureau,  etc.  The  court  defined 
the  meaning  of  the  statute  further  by  declaring  that  the  rule 
applied  not  only  to  finished  products  and  articles  of  daily  use, 
but  also  to  unfinished  goods  and  goods  used  in  production. 

We  may  notice,  finally,  a  third  case,  which  was  decided  on 
appeal  in  a  provincial  court.  The  cartell  concerned  was  that  of 
the  Austrian  enameled  utensil  producers.  The  court  of  original 
instance  declared  the  cartell  contract  null  and  void,  but  held  that 
the  contracts  between  the  cartell  members  and  their  agent  — 
the  provincial  bank  —  were  valid.  The  upper  provincial  court 
denied  the  validity  of  all  these  contracts.     The  court  said  in  part : 

There  is  no  doubt  that  the  agreement  of  the  plate  and  enameled  utensil 
cartell  has  simply  the  purpose  to  raise  the  price  of  an  article  of  con- 
sumption at  present  necessary  and  of  general  use,  or  to  prevent  the 
decline  of  the  same.  ...  If  the  defendants  claim,  therefore,  that 
they  aim  simply  at  the  restoration  of  the  market  to  normal  conditions, 
then  that  is  simply  to  be  understood  in  the  interest  of  the  cartelled 
firms,  but  not  in  the  interest  of  the  public.  .  .  .  The  objection  that 
since  the  formation  of  the  cartell  the  retail  prices  have  fallen  is  irrele- 
vant, according  to  the  coalition  law,  as  regards  the  legal  operation  of 
the  cartell. 

It  seems  that  the  court  regarded  the  contracts  between  the  car- 
telled producers  and  the  bank  which  acted  as  their  agent  as 
invalid,  on  the  ground  that  the  general  organization  fixed  the 
prices  and  the  bank  was,  in  effect,  an  organ  of  the  cartell  and 
not  a  third  party. 

The  criticism  of  jurists  is  of  considerable  interest  in  connection 


746  TRUSTS,    POOLS  AND   CORPORATIONS 

with  the  Austrian  law.  Menzel  wrote,  in  1894,  that  "Austria  is 
the  only  state  which  possesses  an  explicit  and  unambiguous  legal 
norm  concerning  the  validity  of  cartell  agreements."  Neverthe- 
less the  lower  courts  have  not  shown  perfect  agreement  with  the 
supreme  court  as  to  the  meaning  of  the  law,  and  some  intelligent 
writers  have  strongly  objected  to  the  position  taken  by  the  su- 
preme court.  Hitchmann,  for  example,  criticizes  the  declaration 
of  the  court  in  the  talc  producers'  cartell  case,  on  the  following 
grounds:  (i)  there  was  no  express  price  agreement,  which  he 
thinks  should  be  necessary  to  bring  it  clearly  within  the  prohibi- 
tion of  the  law;  (2)  '' Gewerbsleiite''  does  not  include  manufac- 
turers, but  designates  only  petty  craftsmen ;  and  (3) the  "public" 
does  not  mean  a  particular  group  of  people,  but  the  people  gener- 
ally, who  are  interested  in  the  prices  of  consumption  goods  only. 

Grunzel  (who  is  in  a  measure  a  representative  of  the  industrial 
interests)  also  objects  strongly  to  the  interpretation  of  the  law 
given  by  the  supreme  court.  He  holds  with  Hitchmann  that 
neither  law  nor  custom  warrants  applying  the  term  "  Gewerbs- 
leute"  to  large  corporations.  Further,  he  denies  that  the  exist- 
ence of  a  cartell  is  sufficient  evidence  of  intent  to  raise  prices, 
and  asserts  that  most  cartells  do  not  attempt  to  raise  prices,  but 
try  to  keep  them  from  falling.  He  points  out  that  the  law  ex- 
pressly states  that  agreements  designed  to  advance  prices  are 
unlawful,  and  he  ridicules  the  attitude  of  the  court  in  saying  that 
the  proof  that  retail  prices  have  fallen  is  irrelevant.  He  holds 
also  with  Hitchmann  that  the  commodities  embraced  within  the 
meaning  of  the  law  are  those  of  general  use,  and  would  not 
include,  for  example,  locomotives  or  potash. 

Still  more  significant  is  the  statement  made  ia  the  explanation 
of  motives  which  accompanied  the  celebrated  Austrian  cartell 
bill  of  1897.  The  representatives  of  the  government  expressed 
doubts  as  to  how  far  the  law  of  1870  would  be  applicable  in  re- 
spect to  the  validity  of  cartell  agreements.  According  to  the 
opinion  expressed  therein,  it  would  not  affect :  ( i )  cartells  for  the 
maintenance  (not  increase)  of  prices  ;  (2)  cartells  for  the  depres- 
sion of  the  prices  of  the  raw  material,  whether  directly,  or  indi- 
rectly by  a  rayo7i  agreement;  and  (3)  cartells  to  procure  more 
favorable  arrangements  as  to  freights,  insurance,  etc. 


LAWS   CONCERNINCx   MONOPOLY   IN    EUROPE       747 

In  regard  to  the  question  whether  prices  have  h€tn  advanced 
or  not,  attention  should  be  called  to  the  wording  of  the  statute, 
which  expressly  regards  aim  or  purpose  (Zwcc^).  Rundstein 
approves  of  the  position  taken  by  the  courts  that  the  actual  price 
movement  is  immaterial. 

In  spite  of  the  unfavorable  attitude  of  the  law,  cartells  have 
flourished  in  Austria  almost  as  vigorously  as  in  Germany.  They 
exist,  as  Landesberger  says,  according  to  the  maxim  :  "  Where 
there  is  no  plaintiff,  there  is  no  judge."  He  says  that  the  cartells 
might  be  attacked  successfully  only  if  an  action  by  outsiders 
{actio  popularis)  were  allowed,  though  even  such  an  action  would 
not  do  much  more  than  procure  a  formal  declaration  of  nullity. 
Such  agreements  exist,  in  other  words,  not  by  virtue  of  law  but 
on  the  basis  of  business  convenience  and  commercial  faith  and 
credit  —  "but  only  as  long  as  self-preservation  is  not  at  stake." 
Their  existence  and  practical  operation  depend  on  the  interests 
of  private  parties  in  maintaining  or  destroying  them,  so  that 
under  the  existing  law  the  good  ones  may  be  destroyed  and  the 
bad  ones  may  survive.  The  effect  of  the  law  of  1870,  therefore, 
according  to  this  authority,  is  to  deprive  parties  of  the  right  of 
complaint  for  the  non-observance  of  cartell  agreements,  and  to 
make  them  void  in  all  matters  for  which  the  courts  have  to  con- 
sider them.^ 

III.    France 

The  era  of  the  Revolution  was  marked  by  the  abolition  of 
the  ancient  corporations,  mait rises  ox  jurandcs,  and  by  the  enact- 
ment of  severe  laws  against  combination.  The  law  of  June 
14-17,  1 79 1,  denounced  agreements  of  members  of  the  same 
trade  to  fix  the  price  of  their  industry  or  labor  as  "unconstitu- 
tional, hostile  to  liberty,  and  of  no  effect."  On  July  26,  1793, 
the  '' loi  contre  les  accapareiirs  "  i.e.  the  law  against  engrossers 
and  the  like,  was  adopted,  which  threatened  offenders  with  the 
penalties  of  death  and  confiscation.  Just  before  this,  on  May 
4>  I793>  the  famous  law  of  the  maximum  had  been  established, 

1  Landesberger,  im  26ten  Juristentag,  pp.  350-355.  It  is  noteworthy  that  the 
Kaufm'dnnischer  Verein  of  Vienna  recently  condemned  any  attempt  by  a  member 
of  a  cartell  to  escape  his  contractual  obligations  by  recourse  to  the  courts.  Cf. 
Kartell- Rundschau,  1904,  p.  435. 


748  TRUSTS,    POOLS   AND  CORPORATIONS 

i.e.  a  law  which  fixed  the  maximum  price  for  each  of  a  great  variety 
of  articles,  in  order  to  afford  a  prompt  remedy  against  monopoly. 
Most  of  the  legislation  of  the  Revolution  in  this  direction  was 
of  an  ephemeral  character,  but  the  law  against  V accapasement, 
with  less  severe  penalties,  was  embodied  in  the  penal  code  of 
1810,  articles  419  and  420,  and  has  continued  to  the  present 
day.     The  more  important  of  these  articles  reads  as  follows : 

Art.  419.  All  those  who  by  false  or  calumnious  reports  sown  by 
design  in  the  community,  by  offers  of  prices  in  advance  of  those  asked 
by  the  vendors  themselves,  by  union  or  coalition  between  the  princi- 
pal possessors  of  the  same  merchandise  or  commodity  not  to  sell  or 
to  sell  at  a  certain  price  only,  or  by  whatever  fraudulent  ways  and 
means,  shall  have  effected  the  advance  or  decline  of  the  prices  of 
commodities  or  merchandise  or  of  public  securities  above  or  below 
the  prices  which  the  natural  and  free  competition  of  trade  would  have 
fixed,  shall  be  punished  with  imprisonment  of  one  month  at  least  or 
of  one  year  at  most  and  with  a  fine  of  five  hundred  francs  to  ten 
thousand  francs.  The  culprits  may,  further,  be  placed  by  decree  or 
judgment  under  the  oversight  of  the  superior  poHce  during  two  years 
at  least  and  five  years  at  most. 

The  following  article  (420)  provides  heavier  penalties  if  the 
commodities  in  question  are  breadstuffs,  bread,  or  wine  or  other 
potables. 

Since  the  adoption  of  this  code,  other  laws  of  minor  impor- 
tance have  been  enacted  concerning  combinations  under  par- 
ticular conditions.  For  our  present  purpose,  these  require  no 
notice.  One  law,  however,  not  directly  concerned  with  our 
subject,  requires  attention,  because  it  has  been  declared  in  some 
quarters  to  abrogate  articles  419  and  420  of  the  penal  code. 
This  is  the  law  of  March  21,  1884,  concerning  the  estabHshment 
of  trade  associations.  In  article  3  of  this  law,  the  aim  of  the 
associations  authorized  is  defined  as  follows :  "  Professional 
syndicates  have  for  their  exclusive  aim  the  study  and  defense 
of  economic,  industrial,  commercial  or  agricultural  interests." 
The  courts  have  held,  as  seems  only  reasonable,  that  this  does 
not  permit  them  to  violate  a  criminal  statute  from  the  operation 
of  which  they  are  not  expressly  excepted. 

One  of  the  earliest  cases  involving  the  status  of  cartells  under 


LAWS  CONCERNING   MONOPOLY   IN   EUROPE       749 

the  criminal  code  was  that  of  certain  soda  manufecturers  of 
Marseilles,  which  was  decided  in  1838.  These  manufacturers 
had  formed  a  combination  to  sell  all  their  output  through  the 
agency  of  one  Mille,  who  added  the  precaution  of  hiring  six 
factories,  which  were  not  in  operation,  in  order  to  prevent  the 
recstablishment  of  competition.  Prices  were  advanced  about 
25  per  cent,  although  the  price  of  the  raw  material  had  declined. 
The  court  of  cassation  declared  briefly  that  this  combination 
came  within  the  prohibition  of  article  419.  In  a  case  decided 
in  the  same  year,  the  court  of  cassation  declared  that  a  combi- 
nation of  concerns  in  the  form  of  a  fusion  or  consolidation  was 
not  an  illegal  coalition,  within  the  meaning  of  that  article, 
because  a  plurality  of  persons  was  necessary,  and  this  was  not 
found  in  a  single  juristic  person  {pcrsonne  morale).  In  the 
year  following  (1839)  an  action  was  brought  against  a  coach 
company,  respecting  agreements  as  to  the  price  of  places,  and 
the  court  of  cassation  declared  that  the  commodities  embraced 
in   article  419  included  incorporeal  as  well  as  corporeal  goods. 

The  following  decision  illustrates  the  application  of  the  law 
where  prices  are  depressed  by  combination.  A  case  came 
before  the  court  of  cassation  in  1879  concerning  a  combination 
among  the  manufacturers  of  iodine,  who  employed  a  common 
purchasing  agent,  divided  up  the  field  which  supplied  the  raw 
material,  and  fixed  the  prices  of  the  same.  The  court  said  that 
this  was  a  combination,  "  organized  by  the  principal  manu- 
facturers of  iodine,"  tending  to  give  to  the  commodity  prices 
above  or  below  the  course  which  would  have  been  determined 
"by  the  free  and  natural  competition  of  commerce,"  and  was 
repugnant,  therefore,  to  article  419  of  the  penal  code  and  to 
article  1133  of  the  civil  code. 

The  earlier  judgments  of  the  French  courts  showed  a  tend- 
ency to  interpret  and  apply  article  419  in  a  comprehensive 
and  effective  manner.  The  modern  tendency  has  been  less 
rigorous.  The  opinion  of  the  court  of  Paris  in  the  following 
case  is  a  good  illustration  of  this  statement.  It  is  quoted  at 
considerable  length,  because  it  shows  very  clearly  the  mode  of 
reasoning  adopted  by  the  courts  at  the  present  day.  The  judg- 
ment is  prefaced  by  a  statement  of  the  facts : 


750  TRUSTS,    POOLS   AND    CORPORATIONS 

That  Ferry  and  May  have  made  contracts  Hke  those  in  question 
with  all  the  other  principal  producers  of  phosphates  of  the  Somme ; 
that  the  production  of  all  the  adherents  thus  grouped  together  is 
about  two  thirds  of  the  total  production  of  the  Somme  ;  that  the 
agreements  present  the  appearance  of  a  contract  of  commission,  but 
it  is  not  the  less  evident  that  they  have  for  their  end  simply  the 
monopoly  \l' accapare7ne7ii\  of  the  product  to  the  profit  of  the  group 
directed  by  Ferry  and  May,  and  of  the  two  latter  themselves,  that,  in 
fact,  each  of  the  adherents  must  limit  his  production  to  a  fixed  figure ; 
that  he  is  forbidden  furthermore  to  sell  or  deliver  directly,  under  any 
form  whatever,  either  in  France  or  abroad,  any  crude  phosphates,  dry 
or  milled,  of  a  standard  equal  to  or  higher  than  dry  60  per  cent  tri- 
basic  calcium  phosphate  ;  that  a  penalty  was  stipulated  in  case  of 
infraction  of  this  clause;  and  that  the  minimum  and  maximum  selling 
price  was  fixed  semi-annually  in  a  general  meeting,  convoked  by  the 
order  of  a  supervisory  committee. . 

On  the  basis  of  these  facts  the  court  reached  the  preliminary 
conclusion  : 

That  such  agreements  are  illegal ;  that  they  constitute,  in  fact,  a 
true  coalition,  tending  to  advance  the  course  of  phosphates  above  the 
price  which  would  be  fixed  by  free  competition  and  to  prevent  sale 
below  the  price  thus  artificially  increased  ;  that  they  fall,  therefore, 
under  article  419  of  the  penal  code  and  would  be  in  consequence  null, 
as  contrary  to  public  order. 

Certain  other  facts  and  considerations,  however,  were  recog- 
nized as  modifying  this  conclusion. 

Considering  that  it  is  necessary,  in  order  that  article  419  apply, 
that  there  be  a  union  or  coalition  between  the  principal  holders  of 
the  same  merchandise  or  commodity,  with  the  intent  of  not  selling 
except  at  a  price  different  from  that  which  would  have  been  fixed  by 
free  competition  ;  that  it  is  proper  to  inquire,  if,  in  the  present  case, 
evidence  is  found  of  this  double  fact,  both  as  concerns  the  union  or 
coalition,  and  as  concerns  the  end  sought  or  obtained  ; 

Considering,  that  it  is  proper,  first  of  all,  to  observe  that  the  mer- 
chandise in  question  [phosphates]  is  a  product  which,  be  it  of  the 
same  grade,  be  it  a  grade  of  less  richness  as  to  the  tri-basic  calcium 
phosphate  which  it  contains,  is  met  with,  not  only  in  the  Somme, 
but  is  further  distributed  in  great  quantity  over  the  whole  surface 
of  the  earth,  and  notably  in  various  parts  of  France,  Belgium  a;nd 
America ;  •  •  . 


LAWS   CONCERNINO    MONOPOLY    IN    EUROPE       751 

Considering,  on  the  other  hand,  that,  if  it  be  true  that  a  certam 
number  of  the  producers  of  the  Somme  are  grouped  arounoT'erry  and 
May,  their  common  agent,  by  their  adhesion  to  contracts  similar  to 
that  of  December  26,  1887,  it  is  proper  to  remember  that  this  group, 
as  results  from  the  explanations  furnished  at  the  bar  by  Cajot  &  Cie. 
themselves,  represent  only  two  thirds  of  the  total  production  of  the 
Somme  ;  and  that,  if  it  is  true,  as  is  observed,  that  by  reason  of  the 
geographical  situation  of  the  deposits  the  operations  of  the  said  group 
can  have  a  great  importance  upon  the  French  market,  it  is  estab- 
lished, on  the  other  hand,  that  this  group  is  held  in  check,  as  well  by 
the  outside  producers  of  the  Somme,  as  by  other  French  and  foreign 
producers ;  .  .  . 

In  view  of  these  facts,  the  court  declared  that  there  v^^as  not 
"the  union  or  coalition  between  the  principal  holders  of  the 
commodity  "  mentioned  in  article  419  of  the  penal  code.  The 
court  added  the  following  significant  statement : 

That  this  syndicate  comprises  in  reality  but  a  part  of  the  phosphate 
works  of  the  arrondissement  of  Doullens  ;  that  they  have  agreed  upon 
the  determination  of  the  amount  of  their  output,  in  order  to  assure  the 
movement  to  market  and  principally  the  exportation  of  the  same,  and 
for  the  defense  of  their  common  interests,  and  to  fight  without  disad- 
vantage the  competition  of  numerous  markets,  as  well  in  France  as 
abroad  ;  that  one  cannot  demonstrate  in  respect  to  it  either  monopoly, 
or  attempt  at  monopoly  of  the  said  commodity. 

A  case  of  international  notoriety,  and  of  some  interest  on 
account  of  the  points  of  law  involved,  arose  in  connection  with 
the  famous  copper  corner  (i 887-1 889)  engineered  by  Secretan 
in  Paris.  Appeal  was  taken  to  the  court  of  cassation  from  the 
judgment  of  the  court  of  Paris,  but  the  same  was  affirmed  on 
grounds  substantially  as  follows.  Secretan  had  caused  an  ad- 
vance in  the  price  of  copper  by  his  contracts  with  producers  in 
various  parts  of  the  world,  who  were  cognizant  of  his  objects 
and  hoped  to  profit  by  his  operations,  but  who  had  made  no 
agreements  with  each  other.  The  price  of  copper,  furthermore, 
was  not  agreed  upon,  nor  was  there  any  attempt  to  fix  it,  though 
it  was  hoped  and  expected  that  it  would  be  advanced.  In  con- 
sidering this  situation  with  respect  to  article  419  of  the  penal 
code,  the  court  of  Paris  declared  that  the  agreement  of  Secretan 


752  TRUSTS,    POOLS   AND    CORPORATIONS 

as  a  buyer  with  the  producers  as  sellers  was  such  as  to  bring  it 
within  the  prohibition  of  the  law,  as  the  combinations  forbidden 
by  the  law  did  not  have  to  be  exclusively  among  either  buyers 
or  sellers,  and  the  agreements  of  the  various  producers  with 
Secretan  were  in  effect,  though  indirectly,  an  agreement  among 
the  producers.  One  circumstance,  however,  essential  to  the 
proof  of  a  violation  of  the  law  was  lacking,  namely,  an  agree- 
ment as  to  the  price.  From  the  nature  of  the  arrangement  this 
could  only  exist  in  the  assumption  by  Secretan  of  an  obligation 
to  sell  only  above  a  certain  price,  and  no  such  condition  was  to 
be  found  in  the  contracts.  Hence  the  court  concluded  that  the 
law  had  not  been  violated. 

A  rather  interesting  case  came  up  in  1892  concerning  a  com- 
bination of  pottery  manufacturers  near  Grenoble  who  had  estab- 
lished a  central  selling  agency.  In  view  of  the  facts  that  the 
agreement  was  limited  as  to  time  and  as  to  markets,  that  it  em- 
braced only  a  minority  of  the  producers  of  the  commodity,  and 
that  the  prices  had  fluctuated  with  the  market,  the  court  concluded 
that  the  agreement  was  not  an  unlawful  one  under  article  419. 

The  courts  do  not  always  take  this  benignant  attitude,  even 
at  the  present  day,  as  may  be  seen  from  the  next  case,  which 
also  shows  the  interpretation  put  on  the  law  of  1884,  regarding 
syndicats  professionch,  with  respect  to  article  419  of  the  penal 
code.  Germain-Perret  brought  a  complaint  against  certain 
dealers  in  aerated  waters  with  whom  he  had  been  associated, 
namely,  eighteen  of  the  principal  dealers  of  Lyons,  who  had 
formed  a  syndicate  in  1891.  This  syndicate  determined  the 
selling  price  under  the  sanction  of  conventional  penalties,  among 
which  was  exclusion  from  the  syndicate,  with  notice  of  the  fact 
to  the  parties  who  operated  the  springs,  from  whom  the  supplies 
were  obtained,  and  with  whom  the  dealers  had  an  understanding 
they  should  be  supplied  exclusively.  In  consequence  of  the  fact 
that  he  was  no  longer  a  member  of  the  syndicate,  Germain-Perret 
found  himself  unable  to  supply  himself  with  mineral  waters,  ex- 
cept by  indirect  and  more  expensive  methods.     The  court  said : 

Considering  that  the  coalition  in  question  has  thus  had  the  effect  of 
advancing  the  price  of  waters  to  him  above  that  which  would  have 
been  fixed  by  the  natural  and  free  competition  of  trade  .   .  . 


LAWS   CONCERNING   MONOPOLY   IN    EUROPE       753 

Considering  that  the  right  accorded  by  the  law  of  Maftfh  21,  1884, 
to  form  syndicates  could  not  exonerate  the  accused  from  the  responsi- 
bility incurred  by  them  by  reason  of  the  above  facts  ;  that  even  if  the 
syndicate  established  by  them  in  189 1  had  been  within  the  terms  of 
that  law,  the  exercise  of  the  rights  conferred  by  it  cannot  render  law- 
ful the  violation  of  the  prohibitions  decreed  by  articles  419  and  420 
of  the  penal  code,  which  have  not  been  abrogated  by  that  law  and  are 
still  in  force.   .   .  . 

An  attempt  to  form  a  monopoly  contrary  to  article  419  of  the 
penal  code  was  condemned  very  recently  in  the  case  of  the  St. 
Astier  lime  company.  This  was  an  association  ''  sous  nom  col- 
Uxtify  The  plaintiff,  Mallebray,  demanded  the  dissolution  of 
the  association,  on  the  ground  that  it  was  formed  with  the  sole 
purpose  of  suppressing  competition  among  the  lime  manufac- 
turers of  St.  Astier.  The  defendants  declared,,  on  the  other 
hand,  that  it  was  not  an  unlawful  coalition,  such  as  had  formerly 
existed  among  them  and  had  been  dissolved  by  judicial  decree 
(December  16,  1890),  but  a  legally  organized  association.  This 
combination  was  condemned,  nevertheless,  on  the  ground  stated 
in  the  complaint. 

The  French  civil  code  contains  certain  provisions  which  are 
of  significance  with  regard  to  the  legality  of  industrial  combina- 
tions, namely : 

Art.  6.    Laws  which  concern  public  order  and  good  morals  may  not 

be  set  aside  by  agreements  of  individuals. 

Art.  1 131.   An  obligation  that  is  groundless  or  is  based  on   a  false 

ground  or  on  an  unlawful  ground  can  have  no  effect. 

Art.  1 133.    The  ground  is  unlawful  when  it  is  prohibited  bylaw  or 

when  it  is  contrary  to  good  morals  or  to  public  order. 

The  provisions  of  the  civil  law  have  often  been  applied  to  in- 
dustrial combinations  by  the  courts,  generally  in  connection 
with  article  419  of  the  penal  code,  but  sometimes  independently 
where  the  penal  code  could  have  no  application.  A  compara- 
tively early  case  dealt  with  an  oral  agreement  of  five  quarrymen 
near  Liverdun  not  to  deliver  stone  for  the  construction  of  a  fort 
at  a  price  lower  than  3.50  francs  per  cubic  meter.  The  court 
of  Nancy,  which  tried  the  case,  said  that  \vhile  article  419  of  the 
penal  code  might  not  apply,  yet  this  agreement  was,  neverthe- 


754  TRUSTS,    POOLS  AND  CORPORATIONS 

less,  "contrary  to  the  principles  of  free  competition,"  and  a 
serious  attack  on  commercial  liberty.  Hence  the  court  declared 
it  "null  and  of  no  effect;  as  having  an  unlawful  basis." 

In  the  case  of  the  iodine  manufacturers  (cited  above,  page  29, 
in  connection  with  article  419  of  the  penal  code),  one  ground 
for  the  decision  was  that  it  was  an  invalid  agreement  under 
article  1133  of  the  civil  code.  In  the  case  of  the  phosphate 
manufacturers,  cited  above,  page  29,  the  lawfulness  of  the  agree- 
ment was  also  questioned  under  the  civil  law,  but  the  court 
declared  that  there  was  "  no  condition  restrictive  of  the  Uberty 
to  sell  phosphates  which  the  defendants  were  eventually  engaged 
to  furnish."  In  the  case  of  the  lime  manufacturers  of  St.  Astier 
(cited  above,  page  33)  the  lower  court  had  condemned  the  com- 
bination on  the  ground  of  article  419  of  the  penal  code ;  on 
appeal  the  case  was  decided  on  the  border  ground  of  articles 
1 131  and  1 133  of  the  civil  code.     The  court  said,  in  part: 

Adopting  the  motives  of  the  first  judges  ;  considering,  moreover, 
that  is  not  necessary,  in  order  to  pronounce  the  nullity  of  the  associ- 
ation denounced  by  Mallebray,  to  establish  that  it  unites  all  the  con- 
ditions exacted  for  the  application  of  article  419  of  the  penal  code; 
that  it  suffices  to  establish  that  the  obligation  of  the  various  parties 
had  an  unlawful  basis  and  purpose  ;  that  such  was  the  case  of  the 
members  of  the  association  criticized,  since  it  results  from  the  facts 
and  circumstances  of  the  case  that  the  said  association  had  been  formed 
only  in  order  to  forestall  and  prevent  the  foundation  of  Saint  Astier  of 
competing  factories,  which  was  contrary  to  the  principle  of  liberty  of 
commerce  and  industry ;  that  thus  the  agreement  attacked  ought  to 
be  annulled  also  by  application  of  articles  1131  and  1133  of  the  civil 
code.  .  .  . 

In  considering  the  French  law  and  the  interpretation  of  the 
courts,  the  first  impressions  probably  would  be  that  they  were 
characterized  by  uncertainty  and  inconsistency.  It  is  doubtful, 
however,  if  this  impression  is  correct.  In  the  interpretation  of 
the  various  rules  established  by  the  law,  it  is  the  effort  of  the 
courts,  as  has  been  shown  by  the  above  citations,  to  ascertain 
whether  there  is  a  combination  exercising  a  monopoly  power  in 
a  manner  injurious  to  the  consumers.  The  matter  is  skillfully 
summed  up  by  Professor  Levy-Ullmann  in  a  note  to  a  recent 


LAWS   CONCERNING   MONOPOLY   IN    EUROPE       755 

case  in  l\\Q.Jour)ialdH  J^alais.  Professor  Levy-Ullmann  chooses 
to  call  all  industrial  combinations  "  trusts,"  hence  this  word  is 
used  in  the  translation. 

For  the  purpose  of  determining  whether  the  trust  submitted  to  their 
judgment  constitutes  or  does  not  constitute  a  coalition  of  monopolists 
united  to  establish  an  artihcial  advance  of  prices,  the  judges  seek  first 
of  all  to  discover  whether  the  trust  represents  in  the  region  where  it 
operates  the  totality,  or  at  least  the  majority  in  number  and  impor- 
tance, of  the  producers  of  the  commodity.  Further,  they  take  into 
consideration  the  area  in  which  the  syndicate  acts ;  the  more  extended 
the  area,  the  more  vast  the  monopoly  and  the  more  difficult  its  de- 
struction. The  duration  of  the  trust  agreement  furnishes  still  a  third 
point  to  be  considered.  They  examine,  finally,  its  influence  upon  the 
course  of  prices  ;  from  the  balance  of  prices,  before  and  after  the 
association  of  the  producers,  from  comparison  of  these  with  the  results 
of  free  competition,  is  obtained,  with  a  quasi-mathematical  precision, 
the  tare  of  the  trust.  Number  of  syndicate  members,  area  of  action, 
terms  agreed  upon,  result  as  to  prices — such  is  the  quadruple  deter- 
mination which  is  established  by  the  most  recent  decisions. 

Some  of  the  other  writers, on  this  subject  make  a  different 
analysis  of  the  juristic  elements  of  the  offense  prohibited  in  arti- 
cle 419.  Thus  Babied  and  Colliez  agree  in  stating  that  the 
courts  recognize  the  following  four  elements,  viz.  :  (i)  plurality 
of  agents;  (2)  principal  holders  of  the  commodity;  (3)  a  de 
facto  change  in  the  price,  above  or  below  what  would  have  been 
effected  by  free  competition ;  and  (4)  an  agreement  not  to  sell 
except  at  such  prices.  It  is  true  that  Babied  insists  that  the 
courts  have  erred  in  holding  that  there  must  be  an  express 
agreement,  and  he  points  out  that  the  text  of  the  law  prohibits 
combinations  "  tending  "  to  the  effects  which  it  desires  to  pre- 
vent. Apart  from  verbal  distinctions,  which  are  of  considerable 
importance  in  the  practical  application  of  the  law  to  this  or  that 
industry,  etc.,  there  are  one  or  two  points  that  may  be  noted 
more  particularly.  Article  419  furnishes  protection  against  a 
combination  of  persons ;  but  a  fusion  or  consolidation,  in  gen- 
eral, escapes  its  prohibitions.  Babied  says  that  in  such  case, 
nevertheless,  the  parties  may  be  attacked  under  articles  1131 
and  1 133  of  the  civil  code,  and,  indeed,  that  the  courts  in  case 


756  TRUSTS,    POOLS   AND    CORPORATIONS 

of  need  should  apply  those  sections  ex  officio.  In  France,  how- 
ever, a  fusion  is  an  uncommon  method  of  combination.  If,  on 
the  other  hand,  the  combination  is  made  by  establishing  a  com- 
pany as  a  central  agency,  this,  according  to  De  Birague,  will 
not  enable  the  parties  who  have  formed  it,  and  who  control  it, 
to  escape  the  law. 

Duchaine  complains  that  the  law  is  of  little  practical  value  in 
view  of  the  almost  undisturbed  monopoly  enjoyed  by  the  sugar 
and  oil  combinations,  and  Colliez  calls  it  a  "  superannuated  text," 
which  does  not  correspond  to  the  necessities  of  the  present  day. 
This  writer  in  fact  says  that  the  benevolent  attitude  of  the  courts 
in  recent  years  is  "inspired  perhaps  by  the  desire  to  permit  the 
French  manufacturers  to  combat  with  equal  weapons  against  their 
foreign  competitors." 

IV.    Conclusion 

A  comparison  of  the  laws  concerning  combinations  in  the 
three  chief  commercial  states  of  continental  Europe  affords  a 
valuable  basis  for  the  inductive  determination  of  the  proper 
principles  of  jurisprudence.  It  is  doubtful  whether  a  study  of 
the  whole  field  would  add  very  much  to  the  solution  of  the 
problem.  The  three  countries  considered  furnish  excellent  types 
of  three  ways  in  which  industrial  combinations  may  be  treated. 
The  French  law  forbids  such  combinations  as  conspire  to  ad- 
vance prices  above  a  competitive  level ;  the  Austrian  law  de- 
clares no  criminal  penalty  against  combinations,  but  by  declaring 
their  agreements  null  and  void  withdraws  from  them  the  pro- 
tection of  the  courts  ;  the  German  law  not  only  does  not  con- 
demn them,  but  recognizes  their  complete  validity  at  the  civil 
law.  It  is  undoubtedly  true,  as  Rundstein  says,  that,  except 
in  America,  there  is  no  such  thing  as  a  cartell  law  proper ;  the 
laws  affect  cartells  only  incidentally. 

The  tendency  is  certainly  away  from  penal  legislation,  show- 
ing therein  a  striking  contrast  to  recent  developments  in  Amer- 
ica. In  several  countries  penal  laws  have  been  abolished  within 
the  last  century,  e.g.  in  Germany,  Austria,  Belgium,  and  Italy. 
Most  of  the  legislation  on  this  subject  to-day  dates,  however, 
from  a  period  when  combinations  had  not  acquired  the  signifi- 


LAWS  CONCERNING   MONOPOLY   IN   EUROPE       757 

cance  that  they  now  possess.  The  only  really'^oteworthy 
attempts  at  new  legislation  respecting  industrial  combinations 
have  been  made  in  Austria,  and  it  is  significant  that  the  Aus- 
trian cartell  bill  of  1 897-1 898  (cited  above,  page  26)  did  not  con- 
template their  destruction,  but  their  recognition  and  subjection 
to  governmental  supervision.  A  somewhat  different  attitude, 
it  is  true,  was  taken  in  the  recently  introduced  bill,  concerning 
the  relations  of  the  sugar-beet  growers  to  the  m.anufacturers. 
This  bill  provided  that  all  rayon  cartells,  or  agreements  on  the 
part  of  the  manufacturers  to  divide  the  field,  should  be  null  and 
void,  as  well  as  all  boycotting  agreements  on  the  part  of  the 
beet-growers ;  and  it  also  provided  penalties  for  those  who 
should  attempt  to  put  such  agreements  into  effect  by  intimida- 
tion or  force.  This  is  a  return  in  the  policy  of  the  government 
to  the  principles  established  under  the  prevailing  system  of  law. 

Positive  conclusions  with  regard  to  the  merits  of  these  differ- 
ent systems  cannot  be  attained  by  analysis  of  the  laws  alone. 
A  very  extensive  knowledge  of  the  social  and  economic  condi- 
tions and  of  the  practical  working  of  the  laws  is  equally  neces- 
sary, but  for  this  the  data  obtainable  are  as  inadequate  as  the 
subject  is  elusive.  It  is  an  easy  and  obvious  criticism  that, 
whether  combinations  are  liable  to  criminal  penalties,  as  in 
France,  or  to  a  declaration  of  nullity  at  the  civil  law,  as  in 
Austria,  or  have  full  validity,  as  in  Germany,  they  flourish  in 
all  three  countries.  The  vital  question  is  whether  combinations 
are  as  inimical  to  the  public  welfare  in  one  country  as  in  another, 
and  to  what  extent  the  legal  system  may  account  for  such  dif- 
ferences as  may  exist  in  this  respect.  In  this  connection,  also, 
it  would  be  proper  to  study  the  powers  and  vigilance  of  the  public 
administration  in  preventing  abuses.  These  subjects  are  beyond 
the  scope  of  the  present  inquiry,  but  proper  information  on  these 
points  might  considerably  alter  conclusions  drawn  from  the  laws. 

According  to  the  French  law  industrial  combinations  per  se 
are  not  prohibited,  but  only  combinations  which  commit  certain 
acts  held  to  be  injurious  to  the  welfare  of  the  community.  An 
indiscriminate  prohibition,  in  the  face  of  powerful  economic 
tendencies  supported  by  widespread  if  not  general  conscious- 
ness in  business  circles  that  these  tendencies  are  economically 


758  TRUSTS,   POOLS  AND    CORPORATIONS 

necessaryand  defensible,  fails  almost  entirely  in  achieving  its 
purpose.  It  overleaps  the  bounds  of  justice  and  expediency. 
It  condemns  the  loose  combination,  while  giving  complete  valid- 
ity to  the  fusion.  It  condemns  the  good  and  the  bad  combination, 
without  effectually  restraining  either  of  them.  If  the  law  aims 
to  destroy  monopoly,  the  loose  combination  is  no  more  guilty  than 
the  consolidation.  Monopoly,  however,  is  practically  recognized 
and  established  by  the  state  in  many  ways.  It  is  idle,  therefore, 
to  say  that  monopoly  is  wrong  and  must  be  extirpated  whenever 
and  wherever  found  ;  monopoly  is  a  fact  which  often  exists  of 
necessity  and  which  the  law  cannot  destroy.  The  injurious  ele- 
ment which  has  made  both  combination  and  monopoly  odious 
is  extortion,  but  this  is  not  a  necessary  element  of  either  of  them. 
It  is  the  recognition  of  this  fact  that  is  the  great  merit  of  the 
French  law.  The  French  penal  code,  in  prohibiting  combina- 
tions tending  to  give  a  commodity  a  price  other  than  that  which 
would  be  fixed  by  free  competition,  aims  to  check  and  punish 
extortion,  and  that  is  a  perfectly  proper  matter  for  criminal 
legislation,  whether  it  is  considered  from  the  standpoint  of  juris- 
prudence or  of  political  economy.  The  form  of  the  law  is  doubt- 
less crude  and  antiquated,  but  it  has  been  saved  by  the  skillful 
interpretation  of  the  courts.  It  has  one  great  fault,  namely, 
that  it  is  applicable  only  to  a  combination  of  persons.  The 
evils  which  it  seeks  to  punish,  however,  may  be  committed,  and 
in  these  days  of  "trusts"  are  likely  to  be  committed,  by  a  com- 
bination of  persons  which  the  law  does  not  recognize  as  such  — 
by  a  combination  which  the  law  regards  as  a  single  person,  viz.^ 
a  corporation.  This  danger  is  not  so  great  in  France  as  else- 
where, but  it  forms  nevertheless  a  theoretical  defect  in  the  law. 
In  France  the  cartell  organization  is  preferred  to  the  consolida- 
tion, and  if  the  law  can  be  applied,  as  recent  cases  seem  to  indi- 
cate, to  the  central  company  {comptoir,  syndicat)  of  a  cartell,  this 
objection  to  a  large  extent  disappears. 

In  a  similar  manner  the  civil  law  of  France  recognizes  the 
legality  of  combinations,  provided  their  acts  are  not  injurious  to 
the  public  welfare  according  to  the  standard  of  free  industry. 
This  seems  to  be  a  much  fairer  and  much  wiser  system  than  to 
declare  them  invalid  without  respect  to  their  character  or  opera- 


LAWS  CONCERNING   MONOPOLY   IN    EUROl'K       759 

tion.  Herein  the  French  law,  or  rather  the  law  as" it  is  inter- 
preted by  the  French  courts,  seems  superior  to  the  Austrian  law 
as  that  is  interpreted  by  the  Austrian  courts.  It  is  true  that  the 
Austrian  law  declares  that  the  agreements  of  a  combination  are 
null  and  void  only  in  case  they  aim  to  raise  the  price  of  a  com- 
modity to  the  disadvantage  of  the  public,  but  the  courts  have 
taken  the  position  that  this  is  a  necessary  result  of  such  a  com- 
bination, and  that  the  question  of  the  actual  course  of  prices  is 
irrelevant.  As  the  law  thereby  withholds  its  protection  from  all 
combination  agreements,  whether  harmless  or  injurious,  it  tends 
to  degrade  the  former,  and  gives  an  opportunity  to  the  unscrupu- 
lous to  repudiate  their  engagements. 

The  German  law  does  not  make  this  mistake  ;  it  puts  a  cartell 
contract  on  the  same  basis  as  any  other  contract.  The  good 
cartells  are  allowed  to  pursue  the  even  tenor  of  their  ways,  the 
bad  cartells  are  subjected  to  the  various  penalties  and  disabilities 
provided  for  all  persons  and  associations  under  the  criminal  and 
civil  law.  In  this  respect,  indeed,  there  seems  room  for  im- 
provement in  more  complete  protection  against  cartell  excesses, 
particularly  against  arbitrary  treatment  in  the  supply  of  com- 
modities and  against  the  demand  of  extortionate  prices. 

The  prohibition  of  extortion  through  excessive  prices  is  not  to 
be  confounded  with  the  legislative  regulation  of  prices.  Legis- 
lation fixing  a  "just  price"  is  sometimes  practicable  and  desir- 
able, but  it  is  not  adapted  to  many  branches  of  industry.  While 
legislative  regulation  of  prices  is  impossible  as  a  general  remedy, 
it  seems  none  the  less  certain  that  the  crux  of  the  whole  problem 
is  the  prevention  of  extortionate  prices  and  not  the  prohibition 
of  combination.  If  the  price  extortion  of  a  combination  is  not 
destroyed  by  the  competition  it  excites,  it  will  not  be  destroyed  by 
legislation  against  combination.  It  is  easy  to  consolidate  owner- 
ship. Where  strong  "  natural  monopoly  "  elements  exist,  compe- 
tition is  quite  sure  to  be  eliminated  in  the  long  run.  The  relief 
which  is  sought  for  the  evils  attributed  to  combinations  may  be 
obtained  more  effectively  by  directing  attention  to  prices,  and  the 
remedies  available  are  to  be  found,  not  only  in  the  law,  but  also 
in  administration  and  in  public  enterprise,    pj^^^cis  W\lker 

Washington,  D.C. 


XXI 

THE   NEW   COMPANIES   ACT,    1900^ 

THE  wickedness  of  the  company  promoter  is  no  new  thing  : 
in  the  wild  bubble  craze  of  171 5  one  gentleman  proposed 
to  float  a  bubble,  or  company,  to  import  jackasses  from  Spain, 
and  another  a  company  for  a  purpose  "  to  be  disclosed  hereafter," 
and  decamped  in  the  evening  with  his  pocket  full  of  guineas ; 
but  at  the  same  time  it  is  the  adoption  of  the  principle  of  limited 
liability  which  has  given  the  company  promoter  his  great  oppor- 
tunity. That  principle  is  now  so  familiar  that  it  is  difficult  to 
realize  how  modern  it  is  —  in  fact,  not  yet  fifty  years  old.  Since 
1862,  when  previous  tentative  experiments  of  Parliament  were 
reconsidered  and  embodied  in  the  Code  Napoleon  of  the  limited 
company,  there  have  been  numerous  amending  Acts,  but  it  is 
only  within  the  last  six  or  seven  years  that  public  opinion,  of  the 
city  prince  no  less  than  of  the  country  parson,  has  demanded 
radical  reform. 

The  late  Lord  Chief  Justice  brought  before  the  public  in  1898 
some  startling  figures.^  During  the  seven  years  from  1891  to 
1897,  28  millions  of  money  was  lost,  20  odd  to  shareholders,  and 
7  to  creditors.  These  figures,  though  much  quoted,  require  very 
considerable  correction,  for  they  are  at  the  same  time  too  com- 
prehensive, and  not  comprehensive  enough ;  on  the  one  hand 
Lord  Russell  took  no  account  of  the  losses  made  by  companies 
wound  up  voluntarily  and  not  under  the  jurisdiction  of  the  Court, 
and  if  these  be  added,  the  average  annual  loss  for  the  five  years 
ending  December,  1897,  works  out  at  12  millions  of  money  at 

1  From  the  Economic  Journal,  Vol.  XI,  1901,  pp.  180-192.  The  substance  of 
this  paper  was  delivered  as  a  lecture  at  the  London  Chamber  of  Commerce,  the 
President,  W.  Sandeman,  Esq.,  in  the  Chair,  on  Wednesday,  Nov.  21,  1900. 

2  See  Times,  Nov.  10,  1898. 

760 


THE    NEW   COMPANIES   ACT,    1900  761 

the  least. 1  On  the  other  hand,  the  whole  basis  onAvhich  these 
figures  of  assumed  loss  are  calculated  is  unsound ;  for  much  of 
the  apparent  loss  of  capital  on  winding  up  is  compensated  by 
schemes  of  subsequent  reconstruction  or  amalgamation.^ 

The  law  allows,  no  doubt,  far  greater  freedom  in  England 
than  is  possible  abroad  ;  anything,  for  instance,  like  the  "  simul- 
taneous formation  "  usually  employed  in  Germany,  where  the 
promoters  nnist  themselves  take  all  the  shares,  would  not  be 
tolerated  here  for  a  moment ;  and  many  have  felt  there  is  a  grave 
danger  in  sacrificing  any  portion  of  this  freedom. 

"  Restrictive  provisions  which  may  have  the  effect  of  either 
curtailing  the  facilities  for  the  formation  of  companies  which 
bring  so  much  business  to  England,  or  of  embarrassing  the 
administration  of  companies,  or  deterring  the  best  class  of  men 
from  becoming  Directors,  are  not  to  be  hghtly  entertained."  ^ 

In  1894  a  Department  Committee  presided  over  by  Lord 
Davey  was  appointed  and  reported  in  1895:*  the  Committee 
received  memoranda  from  many  Chambers  of  Commerce  and 
other  public  bodies  throughout  the  United  Kingdom,  and  took 
evidence  as  to  the  law  of  companies  in  France,  Germany  and 
America,  and  may  be  said  to  have  brought  within  the  four  cor- 
ners of  a  blue  book  every  suggestion  that  the  wit  of  man  has 
ever  heard,  thought  or  dreamt  of  in  connection  with  Company 
Law  Reform.  The  Committee  at  the  end  of  their  report  sub- 
mitted a  draft  bill  of  49  clauses :  this  Bill  was  examined  by  a 
committee  of  the  House  of  Lords  in  1897,  and  two  following 
years,  and  was  finally  introduced  into  Parliament  by  the  Secre- 

^  Eighth  General  Annual  Report  by  the  Board  of  Trade  in  companies  winding  up 
in  1899,  p.  6 ;   see  also  return  of  Joint  Stock  Companies,  August,  1899,  pp.  326-329. 

^  This  the  Board  of  Trade  officials  are  the  first  to  admit;  see  Eighth  General 
Annual  Report,  sup.  cit.,  p.  6.  How  much  apjiarent  loss  is  so  made  good  the  Board 
of  Trade  Report  says  it  is  impossible  to  estimate. 

^  Report  of  Lord  Davey's  Committee,  1895,  P-  '^''  Evidence  was  produced  before 
that  committee  that  the  paid-up  capital  of  companies  in  England  amounted  in  1894 
to  1035  millions  sterling,  of  companies  in  France  to  420  millions,  and  of  German 
companies  to  300  millions,  giving  a  surplus  to  English  companies  over  the  other  two 
countries  of  315  millions. 

*  The  committee  consisted  of  thirteen  names,  all  of  the  highest  authority  in  the 
world  of  commerce  and  law,  amongst  them,  Lord  Justice  Vaughan  Williams,  Mr 
Justice  Buckley,  Mr.  Palmer,  Mr.  John  HoUams  and  Sir  Albert  RoUit. 


762  TRUSTS,   POOLS  AND   CORPORATIONS 

tary  to  the  Board  of  Trade  last  summer  and  passed  into  law : 
every  clause  in  the  Bill  has  been  tossed  to  and  fro  a  hundred 
times ;  outworks  against  roguery  skilfully  run  up  by  Mr.  Palmer 
one  day  were  swept  away  by  the  flood  of  Mr.  Justice  Buckley's 
caustic  criticisms  the  next :  every  line  of  the  Bill  has  been 
swamped  in  a  flood  of  discussion  and  printers'  ink  :  it  is  sad  that 
after  such  a  lengthy  period  of  incubation  the  legislative  chicken 
has  emerged  so  imperfectly  shaped. 

The  result  of  all  this  discussion  has  of  course  been  a  compro- 
mise, and  the  original  49  sections  have  now  shrunk  to  36. 
The  discussions  on  the  Bill  revealed  general  agreement  as  to  the 
more  serious  mischief  to  be  remedied,  and  it  is  worth  while  to 
enumerate  the  prominent  ones. 

1.  TJie  One  Man  Company.  — \x\  order  to  secure  registration 
with  limited  liability  the  Act  of  1862  requires  the  signatures  of 
seven  1  persons  to  the  original  memorandum  of  incorporation, 
each  taking  one  share  in  the  company,  but  up  to  the  present 
English  law  has  taken  no  heed  whether  those  seven  signatories 
are  dummies  or  no ;  that  company  may  be  really  constituted  by 
one  man  who  pays  the  first  subscription  for  each  of  the  other 
six,  and  so  secures  their  signatures.^ 

2.  Insufficient   Subsci'iption.  —  Many    companies    proceed   to 

1  In  Germany,  since  1892,  limited  liability  partnerships  —  Gesellschaften  mit  be- 
schrankter  Haftung — may  exist.  American  law,  of  course,  varies:  in  the  state  of 
New  Jersey  "three  or  more  persons  may  become  a  corporation"  (f.^.  a  company). 
Revision  of  1896,  Sec.  6:  three  also  are  sufficient  for  incorporation  in  the  state  of 
New  York,  Law  of  1890,  Sec.  2:  Lord  Justice  Lindley  advocated  that  one  person 
should  be  allowed  the  privileges  of  incorporation  provided  he  wrote  Limited  after 
his  name. 

'^  This  is  the  result  of  the  decision  of  the  House  of  Lords  in  Aron  Solomon's 
case  in  1896.  Solomon  floated  off  his  business  as  a  leather  merchant  into  a  com- 
pany consisting  of  himself,  and  his  wife  and  daughter  and  four  sons,  from  whom  he 
received  in  payment  ^20,000  in  shares,  and  ;^io,ooo  in  debentures,  with  a  floating 
charge  over  the  whole  business;  he  was  managing  director  and  could  outvote  the 
other  six  signatories,  and  by  means  of  his  debentures  come  in  with  priority  in  a  wind- 
ing up  over  ordinary  creditors;  when  the  inevitable  winding  up  came  the  liquidator 
tried  to  get  the  whole  set  aside  as  futile  in  law  and  fraudulent  in  fact,  that  it  was  no 
company,  but  one  man  attempting  to  evade  the  ordinary  law  of  bankruptcy  and  trade 
with  limited  liability  by  means  of  six  dummies.  Mr.  Justice  Vaughan  Williams  and 
the  Court  of  Appeal  sympathized  with  the  liquidator,  but  the  House  of  Lords  held 
that  the  Act  was  satisfied  with  actual  signatories  whatever  their  motives. 


THE   NEW   COMPANIES  ACT,    1900  y^i 

allotment,  though  totally  insufficient  capital  has  becTf^bscribed. 
Enghsh  law,  from  1862  up  till  January  i,  190 1,  has  required 
neither  a  minimum  amount  per  each  share  nor  a  minimum 
amount  of  shares  to  be  subscribed  before  the  company  can  pro- 
ceed with  its  business.^ 

The  Registrar  of  joint  stock  companies  quotes  a  curious  case 
which  illustrates  the  absolute  absence  of  restraint  in  these 
respects  prior  to  the  present  Act;  in  1891  "The  Ancient  Gold 
Fields  of  Africa,  Limited  "  was  registered  with  a  capital  of 
p^io,ooo,  divided  into  9,600,000  shares  of  one  farthing  each;  the 
total  subscribed  capital  according  to  the  last  return  was  \\d., 
i.e.  precisely  one  share  for  each  of  the  original  seven  signatories. 
It  is  obvious  that  a  company  which  starts  on  its  career  with 
too  Uttle  working  capital  is  as  much  foredoomed  to  failure  as  a 
school  without  scholars. 

3.  Overloading  the  PurcJiase-pricc.  —  The  law  regards  directors 
and  promoters  as  trustees  for  the  shareholders  of  the  property 
of  the  company,  but  the  difficulties  of  securing  disclosures  have 
always  made  evasions  easy,  and  of  these  overloading  the  pur- 
chase-price was  one  of  the  commonest:  in  the  normal  course 
a  promoter  finds  a  flourishing  industrial  concern  worth,  say, 
;^io,ooo,  and  decides  to  float  it  as  a  company  for  as  much  more 
as  he  can  get ;  he  obtains  from  the  proprietors  a  contract  or 
option  to  sell  for  ;^io,ooo;  he  then  forms  a  small  syndicate 
which  is  registered  as  a  company,  and  purports  to  sell  to  it  the 
contract  or  option  at  an  enhanced  price,  say,  ^^50,000 ;  the  syn- 
dicate next  sells  to  the  person  who  is  to  appear  before  the  public 
as  the  vendor  of  the  business,  again,  of  course,  with  an  advance ; 

1  Abroad  limits  are  usually  fixed  in  both  cases.  As  to  the  amount  of  the  share 
this  was  in  France  originally  required  to  be  at  least  100  francs,  but  in  1893  this 
limit  was  reduced  to  25  francs,  so  as  to  encourage  the  small  investors  ;  in  Germany 
the  lowest  amount  per  share  is  usually  £^^0,  though  ;i^lO  shares  are  allowed  in 
exceptional  cases  (1895  Report,  p.  15).  In  America,  New  York  requires  shares  to 
be  not  less  than  five,  or  more  than  one  hundred  dollars  (law  of  1890,  Sec.  2,  4). 
As  to  amount  of  capital  subscribed,  in  France,  by  the  law  of  1893,  ^^^  whole  capi- 
tal must  be  subscribed  and  one-quarter  paid  up,  and  the  same  rule  holds  good  in 
Germany.  New  York  requires  at  least  five  hundred  dollars  with  which  to  begin 
business  (Sec.  4),  and  one-half  of  the  whole  capital  stock  to  be  paid  up  within  a 
year  (Sec.  5).  New  Jersey  requires  a  minimum  of  one  thousand  dollars  with  which 
to  commence  business  (Sec.  8,  iv). 


764  TRUSTS,    TOOLS    AND   CORPORATIONS 

probably  by  this  time  we  have  got  to  ;;^ioo,ooo;  and  lastly,  the 
nominal  vendor  purports  to  make  what  is  called  a  provisional 
contract  with  another  dummy  called  the  trustee  for  the  company, 
subject  to  adoption  by  the  company;  by  this  time  we  are  in  the 
region  of  high  finance,  and  the  price  may  be  anything  up  to 
seven  figures.  The  promoters  thus  keep  piling  up  profits  on 
each  transaction,  and  the  so-called  contract  with  the  syndicate, 
with  the  nominal  vendor,  and  the  provisional  contract  with  the 
trustee  for  the  company  are  obviously  not  real  contracts,  all 
these  persons  being  the  nominees  of  the  promoters. 

4.  TJie  Prospectus.  —  It  was  generally  felt  that  much  more 
might  be  legitimately  required  of  the  prospectus  than  was 
secured  by  the  old  law ;  that  all  the  material  facts  connected 
with  the  promotion  of  the  company  should  be  stated,  and  the 
directors  forced  to  sign,  so  as  to  pin  them  down  to  legal  liability 
for  all  statements  in  the  prospectus. 

5,  Registration  of  Debentjires.  — The  whole  machinery  of  de- 
bentures {i.e.  generally  mortgages  issued  by  the  company  of  all 
its  property)  is  beset  with  difficulty ;  the  common  course  nowa- 
days is  for  the  new-born  company  to  issue  both  shares  and  de- 
bentures together,  and  for  the  vendor  to  take  the  debentures  in 
payment  and  so  keep  his  grip  on  the  neck  of  the  company. 
Take  a  case  mentioned  in  the  last  Board  of  Trade  Report  in 
winding  up,  of  the  Savoy  Press,  Limited,  where  an  undischarged 
bankrupt  formed  a  company  to  purchase  from  himself  a  worth- 
less publishing  business  which  he  had  been  carrying  on  for 
twelve  months  previously;  the  price  was  ^^1500  paid  to  him  in 
cash,  shares  and  debentures ;  the  company  ran  for  two  and 
one-half  years,  incurred  debts  up  to  ^600  to  ordinary  creditors, 
then  the  vendor  came  in,  ousted  the  company,  and  resumed  pos- 
session by  his  mortgage  as  debenture  holder. 

What  makes  a  company  debenture  such  a  powerful  instru- 
ment is  that  the  law  allows  to  the  company  what  it  does  not  to 
the  private  trader,  viz.,  the  power  to  mortgage  the  whole  under- 
taking as  a  going  concern,  by  what  is  known  as  ^.  floating  charge 
in  the  debenture.  This  does  not  affect  the  property  of  the  com- 
pany so  long  as  the  latter  is  solvent,  and  the  company  can  freely 
deal   with  the  property,   sell,   replace   and   even   mortgage  the 


THE   NEW   COMPANIES   ACT,    1900  765 

stock-in-trade,  and  so  on ;  but.  directly  the  deberttTire  holder 
proceeds  to  realize  his  security,  the  charge  iloats  no  longer,  but 
attaches  with  limpet-like  tenacity  to  all  the  property  the  company 
has  at  the  moment.  The  Courts  have  so  favored  the  floating 
charge  that  they  even  allow  it  now  to  attach  to  uncalled  capital, 
though  this  result  was  not  arrived  at  without  a  struggle, ^  and 
Lord  Justice  Romer^  and  others  expressed  strong  opinions  in 
favor  of  restricting  floating  charges  so  as  not  to  attach  to  un- 
called capital. 

The  Act  of  1862  required  each  company  to  keep  a  register  of 
mortgages,  to  be  open  to  creditors  and  shareholders,  but  not  to 
the  general  pubhc.  This  provision,  however,  has  long  been  a 
dead  letter,  for  the  Courts  held  that  a  mortgage  was  equally 
valid  between  the  parties  whether  registered  in  the  company 
register  or  not. 

Lord  Davey's  Committee  decided  that  in  view  of  the  peculiar 
advantages  enjoyed  by  companies  the  law  demanded  amend- 
ment, and  that  a  public  register  should  be  required,  open  to 
inspection  by  every  one,  to  contain  those  particular  kinds  of 
mortgages  or  charges,  with  regard  to  which  companies  enjoyed 
a  privileged  position. 

6.  Lastly,  there  was  much  discussion  about  the  rights  and 
duties  of  auditors.  Auditors  are  not  valuers,^  and  must  take 
much  information  at  second  hand,  but  the  shareholders  are  en- 
titled to  believe  they  have  some  assurance  that  the  company  is 
sound  if  the  balance  sheet  is  signed  by  a  competent  firm  of 
auditors.  Proposals  were  made  that  balance  sheets  should  be 
filed  annually,  and  be  open  to  public  inspection,  but  this  was 
resisted  in  the  interests  of  both  public  and  private  companies. 

^  In  principle  this  extension  appears  to  be  wrong,  as  it  may  be  in  effect  to  issue 
shares  at  a  discount,  so  often  declared  to  be  contrary  to  the  principle  of  the  Act : 
if  a  company's  capital  is  ;^ioo,ooo  in  ^  I  shares,  that,  as  Mr.  Justice  Buckley  and 
others  were  never  tired  of  insisting,  should  be  a  reality  ;  supposing  all  the  shares 
are  subscribed  for,  but  only  los.  is  called  up  on  each  share,  i.e.  ;i^50,ooo  in  all.  There 
is  then  ;!f5o,ooo  still  uncalled,  and  any  creditor  should  be  able  to  rely  on  that  as  an 
asset  of  the  company ;  yet  if  debentures  with  a  floating  charge  are  issued,  as  is  usual, 
at  the  same  time  as  the  shares,  the  ^^50,000  uncalled  is  not  really  an  asset  at  all;  it  is 
mortgaged  to  the  debenture  holders  and  the  real  capital  of  the  company  is  only 
^^50,000.  ^  1897  Committee  Report,  p.  19. 

^  See  Lord  Justice  T.in  lley's  evidence. 


-j^  TRUSTS,    POOLS   AND   CORPORATIONS 

With  the  one  man  company,  the  new  Act  fails  to  deal 
directly,  while  indirectly  the  Act  considerably  strengthens  its 
position.  Doubts  were  suggested  by  a  learned  judge  in  a  recent 
case,^  whether  the  certificate  of  incorporation  granted  by  the 
Registrar  had  really  created  the  company,  on  the  ground  that 
some  of  the  original  seven  signatures  to  the  memorandum  were 
not  genuine.  Section  i  of  the  new  Act  provides  that  the  Regis- 
trar's certificate  of  incorporation  shall  be  "  conclusive  evidence 
that  all  the  requisitions  of  the  Companies'  Acts  in  respect  of 
registration,  and  of  matters  precedent  and  ijicidental  thereto, 
have  been  complied  with,"  so  that  had  Aron  Solomon  forged 
the  other  six  signatures  to  his  memorandum,  his  company  would 
have  been  all  the  same  duly  constituted.^  Nor  does  the  new 
Act  contain  any  clauses  directly  defining  the  powers  and  respon- 
sibilities of  directors  and  promoters,  the  clauses  in  the  draft  bill 
on  the  point  being  erased,^  on  the  ground  that  the  existing  law 
was  probably  sufficiently  stringent  to  meet  all  cases  of  miscon- 
duct.* Further,  some  really  useful  clauses  defining  the  nature 
of  the  balance  sheet  and  what  it  should  contain  have  also  been 
dropped,  and  there  is  no  doubt  that  the  Act  is  the  weaker  for 
their  omission. 

The  principle  of  the  new  Act  may  be  described  as  "publicity 
rather  than  penalty";  to  give  the  death-blow  not  so  much  to 
the  fraudulent  promoter,  as  to  the  ignorant  shareholder,  in  this 
following  the  conception  of  the  late  Lord  Chief  Justice.^ 


1  Mr.  Justice  Kekewich,  in  National  Debenture  Corporation,  1891,  ch.  2,  p.  37. 

2  A  clause  in  the  original  draft  bill  providing  that  where  the  certificate  of  incor- 
poration had  been  obtained  by  fraud,  this  should  be  a  ground  of  winding  up,  was  cut 
out  in  committee. 

^  The  proposal  was  to  require  of  all  directors  "  reasonable  care  and  diligence  "  : 
Lord  Justice  Lindley  was  of  opinion  that  these  words  only  reenacted  the  existing 
law,  Lord  Justice  Romer  thought  they  went  beyond  it. 

*  The  law,  however,  is  undoubtedly  defective  in  many  points,  e^.  a  promoter 
must  make  full  disclosure  to  the  company  of  any  profits  made,  that  is  clear ;  but 
what  is  to  happen  if  he  does  not  ?  The  company  can  of  course  have  rescission  of 
the  contract  :  but  if  this  be  impracticable,  the  company  cannot  recover  from  the 
promoters  their  illicit  profit ;  see  the  very  recent  case  of  In  re  The  Lady  Forrest 
(^Murchison')  Goldttiine,  Law  Journal,  Feb.  2,  1901,  p.  54. 

^  "  \Vhen  appeals  are  made  to  the  public  to  subscribe  to  the  capital  of  undertak- 
ings, everything  ought  to  be  aboveboard,  no  concealment,  no  secret  profits." 


THE    NEW   COMPANIES  AC  r,    1900  767 

It  is  of  course  obvious  that  the  machinery  of  the'Tlompanies' 
Acts  has  been  adopted  by  many  entirely  private  concerns,  the 
managers  of  which  never  intend  to  appeal  to  the  public,  or  to 
let  any  shares  go  out  of  the  hands  of  the  very  small  circle  of 
holders,  but  who  for  family  or  business  reasons  find  the  prin- 
ciple of  limited  liability  very  convenient.  Such  companies  never 
mean  to  appeal  to  the  public,  and  most  of  the  evils  which  the 
Act  was  intended  to  deal  with,  consequently,  cannot  in  such 
cases  arise,  while  to  impose  hampering  conditions  as  to  publica- 
tion of  amount  of  capital  or  of  the  holdings  of  shares  and  so  on, 
would  only  be  to  handicap  them  in  competition  with  trade  rivals. 
Many  witnesses  ^  were  anxious  to  draw  a  hard  and  fast  line 
between  ordinary  public  companies  and  private  or  family  con- 
cerns. The  difficulty  of  definition,  if  nothing  else,  deterred  the 
Committee  from  attempting  such  a  division,  which  does  to  some 
extent  exist  on  the  Continent.  But  while  refusing  to  draw  any 
clear  distinction  directly,  the  Act  does,  in  a  half-hearted  sort  of 
way,  mark  a  difference  between  the  two  classes.  Most  of  the 
new  stringent  provisions  are  to  apply  only  to  companies  "  ivlLich 
issue  an  invitation  to  the  public  to  subscribe."  These,  in  fact,  are 
the  key-words  of  the  Act,  and  their  definition  and  application 
are  alike  beset  with  difficulties.  Take  the  definition  alone. 
Must  the  invitation  be  a  written  or  printed  document,  for  it 
seems  difficult  to  "  issue  "  a  verbal  invitation  }  And  what  con- 
stitutes an  invitation  to  the  public }  Would  an  invitation  to  all 
one's  friends  or  to  all  the  members  of  one's  club  come  within 
the  words  t  These  are  questions  with  which  the  Courts  may  be 
expected  soon  to  be  occupied,  and  the  difficulty  of  applying  the 
phrase  will  appear  directly.  Of  the  provisions  of  the  act,  some 
apply  to  all  companies,  whether  incorporated  before  or  since 
January  i,  1901,  and  some  only  to  those  which  are  incorporated 
since  that  date.     To  take  first  the  chief  provisions   applicable: 

A.    To  all  companies. 

I.  In  order  to  check  the  evils  of  proceeding  to  allotment  with 
insufficient  capital  subscribed,  which  have  already  been  alluded 
to,  the  act  imposes  two  new  restrictions :  on  every  application 
for  a  share,  the  appUcant  must  pay  a  sum  not  less  than  five 

^  E.g.  Lord  Justice  Vaughan  Williams  and  Mr.  Sinclair. 


'j62>  TRUSTS,    POOLS   AND    CORPORATIONS 

per  cent  of  the  nominal  amount  of  the  share  (Sec.  4  (3));  and 
further,  on  the  occasion  of  the  first  allotment  by  a  company,  the 
act  requires  for  the  first  time  a  definite  amount  of  money  to  be 
paid  into  the  company's  coffers  before  allotment,  viz.  either  the 
whole  amount  of  the  shares  offered  to  the  public ;  or  else,  if  the 
company  has  definitely  fixed  in  its  memorandum  or  articles,  a 
certain  amount  less  than  the  whole  issue  on  which  the  directors 
may  proceed  to  allotment,  then  that  amount.  If  the  amount 
subscribed  does  not  comply  with  one  or  other  of  these  conditions 
then  the  directors  will  be  personally  liable,  after  forty-eight  days, 
to  see  that  the  money  is  repaid  to  the  applicant,  and  any  waiver 
by  the  applicant  of  the  rules  is  expressly  forbidden.^ 

Section  4  generally  deals  only  with  share  capital,  and  with 
such  capital  when  "  offered  to  the  public  for  subscription."  As 
a  further  precaution,  every  company  limited  by  shares  is  within 
one  month  of  allotment  to  file  a  return  with  the  Registrar  of 
Joint  Stock  Companies,  stating  the  amount  of  shares  allotted, 
and  the  names  and  addresses  of  the  allottees  (Sec.  7) :  if  any  of 
the  shares  are  allotted  for  services  rendered,  e.g.  to  a  solicitor  or 
vendor,  and  not  for  cash,  the  contract  under  which  such  shares 
are  allotted,  stating  their  amount  and  the  services  or  considera- 
tion for  which  they  have  been  given,  must  also  be  filed ;  ^  this 
contract  will  then  be  open  to  inspection  by  intending  share- 
holders :  this  clause  is  in  substitution  for  a  similar  and  much 
discussed  provision  of  the  Act  of  1867,^  and  is  meant  to  secure 
the  shareholders  full  knowledge  as  to  the  terms  on  which  all 
shares  have  been  allotted.  Curiously  enough  this  Section  7  as 
to  allotment  returns,  applies  to  all  share  companies,  public  or 
private,  and  whether  they  have  issued  an  invitation  to  the  pubHc 
to  subscribe  or  not. 

2.  The  third  and  fourth  evils  to  be  dealt  with  were  over- 
loading the  purchase-price  and  the  prospectus ;  and  it  is  mainly 
through  alterations  in  the  law  as  to  the  latter  that  full  disclosure 
is  secured  as  to  the  former.  The  prospectus  is  defined  as  any 
"notice,  circular,  advertisement  or  other  invitation,  offering  to 
the  public  for  subscription  or  purchase  any  shares  or  debentures 
of  a  company,"  —  not  a  very  satisfactory  definition:  it  would  be 

1  Section  4,  (3),  (4),  (5).  2  Section  7,  i,  b.  ^  Section  25. 


THE    NEW   COMPANIES   ACT,    1900  769 

comparatively  easy  to  frame  a  document  which  woiiTd  secure  all 
the  purpose  of  a  prospectus,  i.e.  advertise  the  company  and  the 
fact  that  it  was  doing  business  and  prepared  to  sell  its  shares 
without  definitely  "  offering  "  them  to  "  the  public  for  subscrip- 
tion." But  assuming  a  document  within  that  definition,  then 
Sections  9  and  10  apply  a  great  variety  of  new  rules  to  it :  it  is 
to  be  dated,  signed  by  each  director  and  liled  with  the  Registrar 
(Sec.  9).  The  prospectus  must  further  contain  a  great  many 
features,  which  it  is  impossible  to  set  out  in  anything  like  detail ; 
it  must  state  the  contents  of  the  memorandum,  the  number  of 
founder's  shares,  and  of  qualification  shares  for  directors,  the 
minimum  subscription  on  which  the  directors  may  proceed  to 
allotment,  together  with  particulars  as  to  shares  or  debentures 
issued  for  considerations  other  than  money.  Then  come  several 
provisions  to  prevent  overloading  the  purchase-price  :  the  names 
and  addresses  of  all  vendors  of  property  purchased  by  that 
company  must  appear,  together  with  the  amount  payable  in 
cash  or  shares  to  the  vendor,  and  where  there  have  been  a  suc- 
cession of  vendors,  then  the  amount  paid  to  each;  the  amount 
payable  for  good  will  (a  frequent  excuse  for  concealed  fraud)  is 
to  be  set  out  particularly :  the  sum  paid  as  commission  for  pro- 
. curing  subscriptions,  for  preliminary  expenses,  and  generally 
anything  paid  to  the  promoter,  must  also  be  clearly  specified, 
and  finally  the  dates  and  parties  to  every  material  contract 
entered  into  during  the  previous  three  years,  not  being  a  con- 
tract made  in  the  ordinary  course  of  business,  must  be  set  out, 
together  with  the  place  where  such  contracts  may  be  inspected. 
In  the  bill  as  originally  drawn  disclosure  was  required  of  "  every 
material  contract  and  every  material  fact,"  but  on  the  energetic 
protest  of  Mr.  Palmer  and  others  in  committee  these  very  wide 
words  were  somewhat  narrowed  and  defined.  With  regard  to 
second  or  subsequent  prospectuses,  if  issued  to  the  outside  pub- 
lic (and  not  to  members  only),  these  provisions  apply  with  modi- 
fications. Where  published  in  a  newspaper,  too,  the  act  takes 
pity  on  the  pockets  of  the  company  and  permits  the  require- 
ments to  be  somewhat  reduced,  e.g.  the  contents  of  the  memo- 
randum may  be  omitted  (Sec.  10,  §  6).  The  act  is  silent  as  to 
the  penalty  if    these  rules  are  disobeyed  :    for  any  one,  e.g.  a 


770  TRUSTS,   POOLS  AND   CORPORATIONS 

director,  zvilfidly  violating  the  act  in  this  respect,  the  penalty  is 
probably  that  of  a  misdemeanor,  with  two  years'  imprisonment 
under  Section  28 ;  and  any  purchaser  of  shares,  injured  by  non- 
compliance, will  have  an  action  for  damages  against  the  person 
liable,  though  he  probably  will  not  be  able  to  secure  rescission 
of  his  contract  with  the  company.^  But  it  is  specially  provided 
that  a  director  can  escape  liability  by  showing  that  he  was  not 
aware  of  the  facts,  which  should  have  been  disclosed  and  were 
not  (Sec.  10,  §  7).  The  act  supplements,  it  does  not  abrogate, 
the  hability  of  the  company  or  directors  under  the  old  law. 
Owing  to  the  definition  of  a  prospectus  the  new  rules  can  only 
apply  to  companies  which  appeal  to  the  public. 

3.  The  fifth  difficulty  mentioned  above  was  the  insufficient 
registration  of  debentures  :  and  Section  14  provides  that,  without 
interfering  with  the  old  register  (though  that,  as  we  saw,  was 
practically  disused),  a  new  register  is  to  be  kept  by  the  Registrar 
of  Joint  Stock  Companies,  open  to  public  inspection  (Sec.  14,  §  8), 
and  a  copy  of  the  new  register  is  also  to  be  kept  at  the  companies* 
offices :  in  this  register  must  be  inserted  (not  all  mortgages, 
note,  nor  even  all  debentures),  but  (a)  miy  mortgage  or  charge  to 
secure  debentiires :  this  refers  to  the  usual  covering  deed  to  secure 
debentures,  but  would  probably  also  include  the  registration  of 
debentures  containing  charges  in  themselves  and  unaccompanied 
by  any  covering  deed :  (b)  a  mortgage  or  charge  on  uncalled 
capital :  the  act  does  not  go  so  far  as  Lord  Justice  Romer  pro- 
posed and  abolish  such  mortgages  altogether  :  (c)  a  mortgage  or 
charge  created  or  evideticed  by  aji  instrument  which  if  execiited  by 
an  individual  would  be  a  bill  of  sale :  it  is  impossible  here  to 
venture  into  the  quagmire  of  the  Bills  of  Sale  Acts,  but  the  gen- 
eral result  of  this  clause  is  that  every  mortgage  or  charge  of 
"  personal  chattels  "  as  defined  by  those  acts  must  be  registered, 
if  the  mortgage  or  charge  is  such  as  to  give  the  mortgagee  or 
chargee  the  power  to  take  possession  of  the  chattels  :  "  personal 
chattels  "  under  the  Bills  of  Sale  Acts  do  not  include  stocks 
and  shares  :  this  subsection  will  not  therefore  compel  mortgages 
by  deposit  of  shares  with  a  bank  to  be  registered :  (d)  a  floating 
charge  on  the  whole  undertaking  or  property  of  the  company. 

1  Cf.,  for  similar  difficulty,  Companies'  Act,  1837,  Section  38,  now  repealed  by 
Section  33  of  the  1900  Act. 


THE   NEW   C0MPANIP:S  ACT,    1900  771 

The  old  law,  as  we  saw,  rendered  the  old  register  useless  by 
allowing  validity  to  mortgages  though  not  registerccTT  the  pres- 
ent act  closes  up  this  hole  of  escape  by  providing  that  in  the 
above  four  cases  the  mortgage  or  charge  unless  registered  within 
twenty-one  days  shall  be  void  as  against  liquidators  and  creditors. 

4.  The  last  difficulty  mentioned  was  the  definition  of  the 
duties  of  the  auditor.  The  provisions  of  the  original  bill  on  the 
subject  have  been  much  cut  down,  at  the  same  time  Sections  21, 
22,  23  are  useful,  and  a  great  improvement  on  the  old  law. 
Every  company,  whether  public  or  private,  whether  appealing 
to  the  world  for  subscriptions  or  not,  must  have  an  auditor,  prop- 
erly remunerated :  if  an  auditor  is  not  appointed  at  the  annual 
general  meeting  the  Board  of  Trade  may  themselves  appoint 
(Sec.  21):  when  appointed  the  auditors  are  to  have  full  right  of 
access  to  the  company's  books  and  the  right  to  demand  all  neces- 
sary information ;  they  are  to  sign  the  balance  sheet  and  to  add 
a  certificate  definitely  stating  whether  their  requirements  as 
auditors  have  been  complied  with,  and  also  whether  in  their  view 
the  balance  sheet  exhibits  a  true  and  correct  view  of  the  state  of 
the  company's  affairs.  It  is  curious  to  note  that  the  act  does 
not  in  terms  say  there  is  to  be  a  balance  sheet,  only  that  the 
auditor  is  to  sign  it,  presumably  if  there  is  one  :  it  is  very  doubt- 
ful if  the  Courts  will  treat  this  as  impliedly  requiring  a  balance 
sheet  in  every  case. 

B.  I.  With  regard  to  regulations  applicable  only  to  compa- 
nies incorporated  since  January  i,  1901,  there  are  new  rules  laid 
down  as  to  directors'  qualification  shares ;  the  act  does  not  insist 
on  such  a  qualification,  but  says  that,  where  the  articles  of  the 
company  require  it,  in  order  to  avoid  difficulties  which  arose, 
under  the  existing  law,  either  the  director  must  sign  the  memo- 
randum for  the  amount  of  these  shares  or  (if  not  an  original 
director)  sign  and  file  with  the  Registrar  a  definite  contract  to 
take  the  proper  number  of  shares  from  the  company  and  pay  for 
them  (Sec.  2,  ii);  the  section  does  not  say  explicitly  with  whom 
the  contract  is  to  be  entered  into,  whether  with  the  company  or 
not.  In  any  case  these  requirements  are  only  necessary  in  the 
case  of  companies  which  "  issue  an  invitation  to  the  public  to 
subscribe,"  a  phrase  which  again  causes  difficulty.     What  is  to 


772  TRUSTS,   POOLS   AND   CORPORATIONS 

happen  if  a  company,  established  on  a  private  basis,  and  so 
managed  for  two  years,  then  requires  more  capital  and  appeals 
to  the  public  ?  Will  the  original  appointment  of  directors 
become  void  because  these  rules  were  not  observed  ?  The  act 
gives  no  answer  to  the  question  though  the  Courts  will  probably 
soon  be  called  on  to  do  so. 

2.  As  already  mentioned,  the  idea  of  a  double  registration 
(preliminary  and  final),  of  a  company,  common  on  the  Continent, 
has  not  met  with  favor  here,  and  Lord  Davey's  Committee 
reported  against  it.  At  the  same  time  the  act  indirectly  does 
adopt  something  of  the  sort  by  enacting  in  Section  6,  that  no 
company  shall  in  future  "  commence  business "  until  certain 
things  have  been  done.  This  requirement  will  in  no  way  affect 
the  registration,  but,  unless  and  until  the  requirements  of  the 
section  are  complied  with,  the  company  though  registered  and 
in  existence  will  be  in  suspense  ;  it  cannot  make  binding  con- 
tracts nor  borrow  money.  The  preliminaries  which  must  be 
complied  with  before  business  may  be  commenced  are :  (i)  the 
proper  amount  of  shares  must  have  been  allotted  {i.e.  either  the 
whole  amount  offered  or  the  proportion  required  by  the  articles, 
Sec.  4) ;  (ii)  the  directors  must  have  paid  a  required  proportion 
of  their  qualification  shares;  and  (iii)  the  secretary  must  have 
filed  a  statutory  declaration  that  these  rules  have  been  complied 
with.  The  Registrar  will  then  issue  a  certificate  allowing  the 
company  to  commence  its  business.  This  section  again  only 
applies  to  companies  which  "issue  an  invitation  to  the  public  to 
subscribe."  A  private  company  need  not  get  the  certificate  to 
commence ;  but  how  are  people,  who  wish  to  contract  with  a 
company,  to  know  whether  it  is  within  the  terms  of  this  section 
or  not .''  Whether  it  has  appealed  to  the  public  or  not .''  The 
point  is  important,  for  if  it  is  a  private  company  which  has  not 
gone  to  the  public,  then  any  person  contracting  with  the  com- 
pany will  be  safe  and  the  company  will  be  bound,  but  otherwise,  if 
the  company  has  appealed  to  the  public  and  not  got  the  Regis- 
trar's certificate  the  company  will  not  be  bound  by  the  contract. 

3.  Though  these  many  restrictions  are  imposed  on  those 
companies  which  appeal  to  the  public  to  subscribe,  they  are 
allowed  one  compensating  privilege,  viz.  that  in  their  case  under- 


THE    NP:W    companies   act,    1900  -jji 

writing  is  in  future  to  be  legal,  and  the  long  recogawrcd  custom 
of  the  City  at  length  receives  the  sanction  of  the  Legislature, 
but  only  on  these  express  terms,  viz.  that  the  payment  of  the 
commission  and  the  amount  of  rate  per  cent  are  authorized  by 
the  articles  and  disclosed  by  the  prospectus  ^  (Section  8). 

Finally  comes  the  question  :  Will  the  act  achieve  its  purpose 
and  check  fraud  ?  That  it  will  provide  work  for  the  courts  for 
years  to  come  is  clear.  The  drafting  is  not  good  and  the  diffi- 
culties of  interpretation,  some  of  which  have  been  pointed  out, 
are  numerous.  But  criticisms  of  the  act  go  deeper  than  that : 
the  provisions  as  to  the  register  of  mortgages,  the  prospectus 
and  the  duties  of  auditors  are  all  useful  and  should  give  some 
protection  to  the  public,  but  as  it  is  proverbially  easy  to  drive 
a  coach  and  four  through  Acts  of  Parliament,  it  should  be  easy 
to  drive  one  through  or  at  any  rate  round  some  of  the  chief  pro- 
visions of  this  act :  there  is  more  than  one  way  of  circumvent- 
ing the  "commencement  of  business"  provision,  of  which  much 
is  clearly  expected  ;  for  instance,  the  company  may  in  its  articles 
mention  some  merely  trifling  sum  on  which  to  proceed  to  allot- 
ment, or  if  the  promoters  shirk  the  publicity  of  this  course,  they 
can  simply  start  in  a  very  small  way,  with  seven  members,  all 
directors,  a  small  capital  of  perhaps  ^100,  issue  this  all  nomi- 
nally to  the  public,  and  so  secure  the  Registrar's  certificate ; 
they  could  then  at  once  launch  out,  increase  their  capital,  say 
to  p^ 5 00,000  and  proceed  as  at  present. 

Again,  all  the  restrictions  on  companies  which  issue  an  invi- 
tation to  the  public  can  at  one  stroke  be  rendered  futile :  many 
companies  domiciled  near  the  Stock  Exchange  never  appeal 
directly  to  the  public  at  all ;  they  are  "baby  creations,"  owing 
their  birth  to  strong  promoting  parents,  their  shares  are  dealt  in 
more  or  less  artificially  by  the  parent  company,  public  quotations 
of  the  shares  appear,  and  eventually  the  public  rush  in  and  buy  : 
the  effect  of  these  clauses  will  probably  be  largely  to  encourage 
this  underground  process. 

In  a  word,  considering  all  the  time  spent  upon  it  it  is  a  pity 
that  the  act  achieves  so  little. 

Montague  Barlow 

^  This  clause  has  already  received  judicial  interpretation.  See  Burrozvs  v. 
Matabele  Gold  Reef,  Lid.,  Sol.  Jo.,   1901,  p.  378. 


XXII 

THE     PROMOTION     OF     COMPANIES     AND     THE 

VALUATION    OF    ASSETS    ACCORDING   TO 

GERMAN    LAW^ 

GERMAN  Company  Law  was  entirely  changed  and  recast 
by  a  statute  passed  in  1884,  which  introduced  a  number  of 
checks  and  restrictions  of  an  entirely  novel  character.  Many 
fears  were  expressed  at  the  time.  All  enterprise  was  to  be  ham- 
pered in  the  future  and  driven  to  foreign  countries.  No  persons 
of  means  and  standing  were  to  be  found  who  would  incur  the 
liabilities  and  risks  to  which  directors  and  promoters  were  to  be 
subject  under  the  new  state  of  things.  Sufficient  time  has  now 
elapsed  to  show  that  the  forecast  of  these  prophets  of  evil  was 
based  on  misapprehension.  The  statistics  prove  conclusively  that 
the  formation  of  new  companies,  far  from  being  arrested  by  the 
greater  stringency  of  the  law,  has  been  progressing  in  a  most 
remarkable  manner,  and  that  the  career  of  German  companies 
has,  on  the  whole,  been  most  prosperous.^     Some  of  the  new 

1  From  the  Economic  Jotirnal,  Vol,  X,  1900,  pp.  1-19.  See  Ring,  Aktiengesetz, 
2d  ed.,  Berlin,  1892;  Pinner,  Das  Deutsche  Aktienrecht,  Berlin,  1899  ;  Esser,  Die 
Aktiengesellschaft,  Berlin,  1899  ;  Riesser,  Die  Neuerungen  im  Deutschen  Aktienrecht, 
Berlin,  1899. 

2  There  were  in  Germany  in  1896  according  to  Professor  R.  van  der  Borght's  esti- 
mate (Conrad's  Hand\v5rterbuch,  Vol.  I,  2d  ed.,  pp.  192-194)  3712  companies 
limited  by  shares  with  a  total  paid-up  capital  of  over  /340,ooo,ooo,  and  with  reserve 
funds  amounting  all  together  to  ^58,000,000  ;  the  annual  net  earnings  of  3249  com- 
panies amounted  to  about  ^^32,400,000,  or  about  10  per  cent  of  the  paid-up  capital. 
It  is  safe  to  assume  from  the  ligures  given  that  not  less  than  one-half  of  the  total 
number  of  these  companies  were  formed  after  the  Act  of  1884.  In  the  blue  book 
published  by  the  departmental  committee  of  the  Board  of  Trade  in  1895  (7779)  a 
letter  is  quoted  from  Mr.  Gerb  of  the  British  Consulate  General  at  Berlin  estimating 
the  total  paid-up  capital  at  ^£'200,000,000  (see  p.  29).  I  showed  at  the  time  (see  p.  30) 
that  the  capital  must  be  at  least  /300,ooo,ooo,  and  the  statistics  given  in  the  text 
prove  conclusively  that  Mr.  Gerb's  estimate  was  still  further  from  the  truth  than  I 
suspected. 

774 


GERMAN    COMPANY    LAW  775 

safeguards  have  not  proved  quite  as  efficient  as  was^expectcd  by 
the  legislature,  but  the  net  result  has  been  a  clear  gain.  There 
are  good  grounds  for  saying  that  dishonest  or  even  reckless 
company  promotion  is  no  longer  known  in  Germany.  No  doubt 
commercial  and  industrious  enterprise  in  that  country  has  lately 
passed  through  a  period  of  prosperity,  which  cannot  be  expected 
to  continue  unchecked  ;  but  times  of  prosperity,  as  a  general  rule, 
facilitate  the  task  of  unscrupulous  financiers,  and  the  absence  of 
unsound  company  promotion  in  such  times  may  be  accepted  as 
satisfactory  proof  of  the  efficiency  of  the  law. 

The  statute  on  stock-exchange  and  produce-exchange  trans- 
actions passed  by  the  German  Reichstag  in  1896,  though  laying 
down  certain  restrictions  as  to  dealings  in  shares  on  the  stock 
exchanges,  does  not  touch  the  law  on  the  formation  and  manage- 
ment of  companies.  The  imperial  commission  on  whose  recom- 
mendation that  statute  was  prepared  ^  accepted  the  testimony  of 
experts  on  all  sorts  of  matters,  however  remotely  connected  with 
the  subject  of  their  inquiry,  and  would  no  doubt  have  listened 
to  any  complaints  that  might  have  been  made  as  to  the  efficiency 
of  the  law  of  1884.  The  fact  that  no  such  criticism  came  forward 
is  good  negative  evidence  of  the  non-existence  of  any  substantial 
grounds  of  dissatisfaction. 

Another  opportunity  for  complaints  against  the  efficiency  of 
the  Act  of  1884  was  given  by  the  inquiries  of  the  committee 
appointed  to  assist  in  the  revision  of'  the  German  mercantile 
code,  but  in  this  case  also  the  only  points  referred  to  were 
matters  of  detail  not  affecting  the  main  principles  of  the  law. 
The  amendments  which  were  introduced  into  the  new  mercantile 
code  in  connection  with  company  law  are  not  without  importance, 
but  they  are  all  in  the  direction  of  strengthening  the  principles 
laid  down  in  1884. 

Company  law  can  be  looked  upon  from  three  different  points 
of  view  :  the  shareholders'  point  of  view,  the  creditors'  point  of 
view,  and  the  point  of  view  of  the  general  public.  If  the  share- 
holders' point  of  view  was  the  only  one  to  be  considered,  much 
might  be   said  in  favor  of   abstention    from    legislative   inter- 

1  The  reports  and  minutes  of  the  sittings  of  this  commission  have  been  published 
and  contain  much  interesting  information. 


Tj6  TRUSTS,   POOLS  AND   CORPORATIONS 

ference.  There  is  no  reason  why  persons  who  invest  or  speculate 
in  the  shares  of  companies  incorporated  in  their  own  countries 
should  enjoy  better  protection  than  those  who  invest  or  speculate 
in  the  shares  of  foreign  companies,  or  in  other  stock-exchange 
securities.  But  the  two  other  points  of  view  are  of  much  greater 
importance;  all  trading  with  unlimited  liability  offers  certain 
safeguards  to  the  creditors  and  to  the  general  public,  which  are 
withdrawn  in  the  case  of  trading  with  limited  liability,  and  ought 
in  that  case  to  be  replaced  by  corresponding  safeguards  of 
another  kind.  I  mention  the  general  public  as  distinguished 
from  the  creditors,  because  the  dangers  to  which  the  general 
public  is  exposed  by  Hmited-liability  trading  are  of  a  kind  dif- 
fering entirely  from  the  risks  incurred  by  creditors.  Bad  com- 
pany law,  as  will  be  explained  in  the  further  course  of  this  article, 
is  a  direct  inducement  to  the  parties  concerned  to  trade  in  an 
unsound  manner,  and  the  effects  of  unsound  trade,  like  those  of 
bad  sanitation,  go  very  far  beyond  the  area  from  which  it  pro- 
ceeds. '  There  is  one  principle  which  should  never  be  disre- 
garded, whenever  the  privilege  of  limited  liability  is  conferred 
by  law ;  the  Hability  of  a  fund  having  a  fixed  and  ascertainable 
value  should  be  substituted  for  the  unlimited  hability  of  indi- 
viduals. The  value  of  this  fund  should  on  the  formation  of  the 
company  correspond  with  the  amount  of  its  nominal  capital,  and 
precautions  should  be  taken  to  prevent,  as  much  as  possible,  the 
diminution  of  this  fund  during  the  subsequent  stages  of  the 
company's  existence.  Company  law  should,  therefore,  find 
means  to  assure  {a)  that  the  value  of  the  property  which  repre- 
sents the  capital  of  a  company  on  its  formation  shall  correspond 
with  the  amount  of  the  nominal  paid-up  capital  of  the  company ; 
(/;)  that  property  of  the  same  value  should  continue  to  represent 
the  paid-up  capital  of  the  company  as  long  as  it  is  not  increased, 
and  that  on  any  increase  of  the  paid-up  capital  the  property 
representing  the  increase  should  be  of  a  value  at  least  equal  to 
the  nominal  amount  of  the  increase.  I  shall  deal  with  each  set 
of  rules  separately. 


GERMAN    COMPANY   LAW  JJJ 

A.  —  Provisions  as  to  Valuation  of  Assets  on  Formation 

OF  Company 

The  amount  of  the  nominal  capital  with  which  a  company  is 
started  in  England  is  purely  arbitrary,  and  need  not  stand  in 
any  relation  to  the  value  of  the  assets  by  which  it  is  repre- 
sented. A  trader  who  converts  his  business  into  a  company 
and  keeps  the  shares  himself  has  every  inducement  to  fix  the 
capital  at  a  high  figure,  and  as  he  is  buyer  and  seller  in  one  per- 
son, the  price  at  which  the  business  is  sold  —  apart  from  the 
question  of  stamp  duties  —  is  absolutely  immaterial. 

If  the  shares  are  to  be  taken  by  the  public  the  character 
which  Company  Promotion  is  apt  to  assume  is  shown  by  the 
following  illustration.  A  trader  wants  to  sell  his  business, 
which  is  worth  ^io,00O,  and  approaches  a  financial  agent  con- 
versant with  such  matters.  The  agent  enters  into  a  conditional 
contract  whereby  he  agrees  to  buy  the  business  in  the  event 
of  his  being  able  to  form  a  company  with  a  paid-up  capital  of 
;i^50,ooo.  The  price  promised  under  the  circumstances  would 
probably  be  ^10,000  in  cash  and  the  same  amount  in  shares. 
The  agent  then  tries  to  find  some  financiers  willing  to  form  a 
syndicate  for  the  purpose ;  if  these  are  found  they  are  substi- 
tuted as  purchasers  for  the  financial  agent,  who  would  prob- 
ably be  satisfied  with  ^^5000  for  his  profit  on  the  transaction. 
These  ;!{^5000  would  probably  be  divided  by  him  with  some 
friends  who  helped  to  collect  the  members  of  the  syndicate. 
The  syndicate  would  subsequently  sell  the  business  to  the 
newly  formed  company  for  the  ^^50,000,  and  if  they  succeed 
in  placing  the  whole  of  the  shares  they  will,  under  the  above- 
mentioned  circumstances,  obtain  a  gross  profit  of  ^25,000,  but 
out  of  this  sum  some  other  intermediaries  must  be  paid,  legal 
expenses  and  stamp  duties  must  be  disbursed,  and,  to  judge 
from  recent  revelations,  the  financial  press  must  receive  en- 
couragement. The  final  result  of  all  this  is  that  the  company 
acquires  the  property  at  a  price  representing  five  times  its  real 
value,  the  difference  being  divided  by  a  number  of  people  who 
have  all  in  their  way  helped  to  float  the  company.     It  is  well 


7/8  TRUSTS,    POOLS   AND   CORPORATIONS 

known  that  this  rate  of  profit  is  by  no  means  exceptional  and  is 
frequently  exceeded. 

Another  circumstance  has  also  to  be  taken  into  consideration 
in  places  in  which  British  Company  Law  is  applied. 

Assuming  in  the  case  just  mentioned,  that  the  public  do  not 
take  all  the  shares,  the  syndicate  may  consider  it  worth  while  to 
go  to  allotment  on  the  amount  subscribed,  and  to  trust  to  chance 
as  to  placing  the  rest  of  the  shares  at  a  subsequent  period.  In 
the  instance  given  above  this  would  have  no  effect  on  the  work- 
ing of  the  company,  as  the  company  would  not  get  any  of  the 
proceeds  of  the  shares  in  any  event,  but  in  some  cases  the  pur- 
chase price  does  not  absorb  the  whole  of  the  nominal  capital, 
some  portion  of  the  latter  being  reserved  as  a  working  capital ; 
in  such  a  case  the  company  has  of  course  to  suffer  by  the  non- 
success  of  the  issue. 

Thus  it  will  be  seen  that  the  principle  of  establishing  a  defi- 
nite fund  available  for  the  payment  of  the  company's  debts,  the 
value  of  which  can  easily  be  ascertained,  is  in  this  country  de- 
parted from  in  two  ways:  (i)  by  the  absence  of  provisions  in- 
suring that  the  property  in  which  the  capital  is  invested  in  the 
first  instance  is  taken  over  at  a  price  representing  its  true  value ; 
(2)  by  the  absence  of  provisions  preventing  a  company  from 
starting  business  before  the  whole  of  its  capital  has  been  sub- 
scribed. As  regards  the  second  point,  the  bill  which  is  now 
before  Parliament  provides  a  partial  remedy  by  requiring  a 
statement  as  to  the  minimum  amount  of  subscriptions  on  which 
the  company  will  proceed  to  allotment,  but  this  mode  of  deal- 
ing with  the  matter,  though  affording  a  certain  amount  of  pro- 
tection to  subscribers  for  shares,  does  not  in  any  way  benefit 
the  interests  of  the  creditors  or  of  the  general  public. 

In  Germany  the  genuine  nature  of  the  valuation  put  on  the 
original  assets  is  secured  by  elaborate  provisions  which  I  shall 
deal  with  at  length,  and  the  starting  of  business  with  an  insufifi- 
ciently  subscribed  capital  is  prevented  by  the  rules  laid  down  in 
sections  195  and  200  of  the  new  mercantile  code,  according  to 
which  the  corporate  existence  of  a  company  cannot  possibly 
begin  before  its  whole  capital  has  been  subscribed  for,  and  before 
at  least  25  per  cent  of  the  amount  payable  in  cash  is  in  the 


GERMAN    COMPANY    LAW  779 

actual  possession  of  the  managers.  There  are  two  modes  of 
formation  permissible  in  Germany  :  (i)  the  simultaneous  method, 
according  to  which  the  promoters  take  up  the  whole  capital  and 
offer  it  to  the  public  after  the  formation  of  the  company  ;  (2)  the 
successive  method,  which  enables  the  promoters  to  offer  the 
shares  before  the  registration  of  the  company  ;  but  in  either  case 
the  subscription  of  the  whole  capital  must  be  complete  before 
the  company  can  begin  business. 

These  requirements  as  to  the  subscription  of  the  capital 
would  not  be  of  much  importance,  if  the  first  point  to  which  I 
have  called  attention,  namely,  the  adequacy  of  the  value  of  the 
property  in  which  the  capital  is  invested,  had  not  been  properly 
attended  to.  This  was  done  by  provisions  requiring  the  following 
things :  {a)  that  certain  matters  relating  to  the  history  of  the 
formation  of  the  company  should  be  inserted  into  the  articles  of 
the  company  ;  {b)  that  the  promoters  should  make  a  report  on 
the  promotion  transactions,  for  the  accuracy  and  completeness 
of  which  they  are  civilly  and  criminally  liable  ;  (c)  by  provisions 
requiring  the  members  of  both  boards  of  the  company  to  examine 
into  the  circumstances  of  the  formation  of  the  company ;  {d)  by 
provisions  requiring  an  examination  by  independent  auditors  in 
certain  cases. 

{a)  The  articles  have  to  state  (among  other  things) : 
(i)  The  nature  of  any  consideration  not  being  cash  against 
which  any  shares  are  issued. 

(2)  The  names  of  any  persons  from  whom  the  company  on 
its  formation  is  to  acquire  any  property,  and  the  prices  at  which 
any  such  property  is  to  be  acquired. 

(3)  The  total  amount  of  any  payments  to  be  made  by  the  com- 
pany for  services  rendered  in  connection  with  the  promotion  of 
the  company. 

{b)  In  all  cases  in  which  any  shares  are  issued  for  any  con- 
sideration not  being  cash,  or  in  which  any  property  is  to  be 
acquired  on  the  formation  of  the  company,  the  promoters  have 
to  prepare"  and  sign  a  written  report,  in  which  they  have  to  set 
out  the  circumstances  from  which  it  appears  that  the  property  to 
be  taken  over  in  Heu  of  cash  or  to  be  acquired  by  the  company 
is  worth  the  amount  for  which  it  is  to  be  taken.     In  this  report 


78o  TRUSTS,    POOLS   AND    CORPORATIONS 

all  transactions  which  led  up  to  the  ultimate  sale  of  the  property 
in  question  to  the  company  must  be  mentioned,  together  with  all 
prices  paid  within  the  preceding  two  years  for  the  purchase  or 
construction  of  any  part  of  such  property  ;  in  the  case  of  a 
company  taking  over  a  whole  undertaking  the  results  of  the 
trading  of  the  two  preceding  years  must  also  be  set  forth.  The 
term  "promoter,"  according  toe.  187, includes  all  signatories  of  the 
articles  of  association,  and  also  all  persons  whose  shares  are  not 
paid  up  in  cash,  and  section  202  provides  that  all  such  promoters 
are  answerable  to  the  company  in  damages  in  respect  of  any  in- 
accuracy or  incompleteness  in  the  above-mentioned  report;  and 
also  that  they  have  to  refund  to  the  company  any  pecuniary  bene- 
fit conferred  by  them  to  any  person  in  connection  with  the  pur- 
chase of  the  property  of  which  no  mention  is  made  in  the  report. 
Promoters  are  released  from  these  liabilities  if  they  can  prove 
that  the  inaccuracy  or  incompleteness  of  the  report  was  neither 
known  to  them  nor  could  have  been  known  to  them  if  they  had 
applied  the  diligence  of  a  prudent  trader.  Third  parties  who 
have  received  any  benefit  not  disclosed  in  the  report  are  also 
liable  in  damages,  if  the  concealment  was  (or  under  the  circum- 
stances of  the  case  ought  to  have  been)  known  to  them.  Any 
promoter  who  knowingly  makes  any  false  statement  in  the  re- 
port in  question  is  also  punishable  with  imprisonment  and  a 
maximum  fine  of  20,000  marks  (section  313). 

{c)  Every  German  company  has  a  supervising  board  and  a 
managing  board;  in  the  case  of  a  "simultaneous"  formation 
the  first  boards  are  appointed  when  the  articles  of  association 
are  signed;  in  the  rare  case  of  a  "successive"  formation,  the 
general  meeting,  which  has  to  be  held  before  the  registration  of 
the  company,  has  to  appoint  them.  Both  these  boards  have  to 
examine  and  report  on  all  the  circumstances  of  the  formation  of 
the  company.  They  have  in  particular  to  inquire  into  the  accu- 
racy and  completeness  of  the  statements  contained  in  the  pro- 
moters' report,  and  this  inquiry  must  also  include  the  examination 
of  the  question,  whether  the  prices  at  which  any  property^  to 
be  taken  over  by  the  company  are  open  to  any  objection 
(sections   192,   193). 

(d)  In  any  case  in  which  one  of  the  members  of  either  board  is 


GERMAN    COMPANY    LAW  781 

a  promoter  or  derives  any  pecuniary  benefit  from  the  promotion 
of  the  company,  and  also  in  any  case  in  which  any  property  is 
to  be  taken  over  by  the  company  on  its  formation,  independent 
auditors  appointed  by  the  local  chamber  of  commerce  have  to 
examine  and  report  as  well  as  the  two  boards  and  in  the  same 
manner.  The  auditors'  report  under  the  law  of  1884  had  degen- 
erated into  a  mere  formality,  but  the  new  code  has  added  some 
provisions  which  will  make  it  much  more  effective  in  the  future. 

Under  the  new  law  the  auditors  may  ask  for  any  information 
in  connection  with  the  subject  of  their  inquiry  which  appears 
relevant  to  them,  and  in  case  of  any  dispute  with  the  promoters 
as  to  the  necessity  of  any  such  information,  the  authority  by 
whom  the  auditors  were  appointed  is  entitled  to  give  a  binding 
decision.  As  long  as  the  promoters  decline  to  give  the  informa- 
tion, the  auditors'  report  is  not  issued  and  the  incorporation  of 
the  company  cannot  take  place.  The  remuneration  payable  to 
the  auditors  is  not  fixed  by  any  person  connected  with  the  com- 
pany, but  by  the  authority  by  whom  they  are  appointed  (section 
194).    Any  agreement  to  the  contrary  is  void.    (Esser,  page  24.) 

All  the  reports  have  to  be  filed  in  the  registry  and  are  open 
to  public  inspection  (sections  195,  199).  This  right  of  inspec- 
tion is  not  taken  advantage  of  to  a  large  extent,  but  if  the 
reports  contained  any  damaging  facts  their  contents  would  soon 
be  known  to  the  public  and  prevent  them  from  taking  shares. 
As  mentioned  before,  the  simultaneous  method  of  formation  is 
almost  universally  applied,  and  under  that  method  the  promoters 
have  to  keep  the  shares  and  pay  up  in  full,  unless  the  public 
comes  forward.  This  circumstance  alone  is  a  sufficient  check 
against  purchases  of  property  at  excessive  prices. 

It  is  no  doubt  true  that  most  persons  who  take  shares  in  new 
companies  are  not  very  watchful  in  reading  reports  or  inspect- 
ing documents,  but  if  there  is  only  one  watchful  person  any 
irregularity  will  soon  be  known  in  the  circles  in  which  shares 
are  usually  placed  and  will  damp  the  enthusiasm,  which  might 
otherwise  have  been  created  in  favor  of  the  new  issue. 

It  may  of  course  still  happen  that  the  prices  at  which  property 
is  taken  over  on  the  formation  of  a  new  company  are  too  high, 
but  the  unnatural  increase  of  these  prices  caused  by  the  com- 


782  TRUSTS,    POOLS   AND   CORPORATIONS  . 

missions  and  profits  of  middlemen,  which  is  such  a  characteristic 
feature  of  EngUsh  company  promoting,  is  a  practical  impossi- 
bility under  the  above-mentioned  provisions. 

The  question  naturally  arises,  How  do  people  in  Germany, 
who  take  trouble  or  risk  in  the  formation  of  a  new  company, 
obtain  the  remuneration,  without  which  they  would  hardly  be 
inclined  to  enter  into  such  transactions  ?  The  answer  is  that  the 
profit  is  entirely  derived  from  the  premium  at  which  the  shares 
are  sold  to  the  public.  It  is  clear  that  the  profits  obtained  in 
this  manner  cannot  be  nearly  as  high  as  those  which  are  fre- 
quently obtained  by  the  EngUsh  methods  of  company  promotion, 
but  large  and  adequate  profits  are  frequently  obtained,  which 
nobody  can  object  to,  as  they  are  perfectly  open.  The  necessity 
of  paying  for  the  shares  before  they  are  issued  to  the  public 
shuts  out  a  certain  class  of  professional  company  promoters,  who 
may  now  be  said  to  be  non-existent  in  Germany,  but  the  starv- 
ing out  of  this  class  of  men  is  an  advantage  from  the  moral  as 
well  as  from  the  economic  point  of  view. 

The  principal  point  is  this  :  in  England  the  promoters'  and 
middlemen's  profit  is  added  to  the  nominal  capital  of  a  company, 
whilst  in  Germany  it  is  added  to  the  price  of  the  shares.  To  the 
shareholder  it  may  be  a  matter  of  indifference  whether  he  buys 
shares  from  the  promoters  at  lOO  per  cent  premium,  or  whether 
the  company  buys  its  assets  at  twice  their  real  value  and  sells 
him  his  shares  at  par,  but  a  creditor  is  necessarily  misled  by 
being  told  that  a  company's  paid-up  capital  is  ^100,000,  when 
the  real  value  of  its  property  is  ;^  50,000,  the  rest  consisting  of 
promoters'  profits.  Moreover,  the  necessity  of  paying  dividends 
on  a  capital  swollen  by  such  profits  leads  to  the  adoption  of  un- 
sound methods  of  trading  and  bookkeeping. 

It  has  been  suggested  that  the  provisions  requiring  the  whole 
of  a  company's  capital  to  be  taken  up  before  the  registration  of 
the  company  may  be  evaded  by  the  employment  of  dummies,  in 
whose  names  the  shares  are  taken,  the  real  promoters  remaining 
in  the  background  and  only  pocketing  the  profit  on  the  sale  of 
the  shares  in  case  of  such  a  profit  being  realized ;  but  such  a 
course  does  not  appear  to  be  adopted  in  practice,  and  would,  if 
adopted,  in  all  probability  defeat  its  own  object ;  if  the  promot- 


GERMAN    COMPANY   LAW  783 

ers'  report  was  signed  by  persons  willing  and  able^fo  contem- 
plate their  liability  with  the  indifference  of  the  ''vacuus  viator,'' 
the  public  would  not  be  tempted  to  take  the  shares,  and  the  real 
promoters  would  lose  their  chance  of  a  profit. 

There  are  some  other  possible  modes  of  evasion  which  have 
been  specially  guarded  against  by  the  German  law. 

It  is  enacted  by  section  207  that  all  contracts  made  within 
the  first  two  years  after  the  formation  of  the  company  for  the 
purchase  or  construction  of  any  buildings  or  plant  intended  to 
be  used  permanently  for  the  purposes  of  the  company's  business, 
or  of  any  land  or  other  immovable  property  at  a  price  exceed- 
ing one-tenth  of  the  company's  capital,  are  invalid  unless  con- 
firmed at  a  general  meeting  in  a  special  manner  which  enables 
shareholders  holding  only  26  per  cent  of  the  company's  capital 
to  defeat  the  scheme. 

A  report  must  be  presented  to  the  meeting  by  the  supervising 
board,  which,  together  with  the  contract,  must,  in  case  of  adop- 
tion by  the  meeting,  be  filed  in  the  mercantile  registry.  The 
members  of  the  supervising  board  are,  according  to  section  208, 
responsible  for  the  contents  of  this  report  in  the  same  way  as 
they  are  responsible  for  the  original  report  on  the  formation  of 
the  company. 

In  the  case  of  an  increase  of  capital,  sections  278  and  279 
provide  for  similar  safeguards  as  those  existing  with  regard  to 
the  original  formation  of  a  company. 

B.  —  Provisions  preventing  a  Diminution  of  the  Property 

REPRESENTING    A    ComPANY's    CAPITAL 

The  measures  which  are  taken  for  the  purpose  of  assuring 
that  the  amount  of  the  original  capital  of  a  company  is  truly 
represented  by  the  value  of  its  property  are  insufficient,  unless 
they  are  accompanied  by  measures  preventing,  as  far  as  possible, 
the  diminution  of  the  capital  during  the  subsequent  stages  of 
the  company's  existence.  In  this  respect  also  the  provisions  of 
English  law  are  hopelessly  inadequate.  The  courts  have  indeed 
frequently  laid  down  the  rule  that  dividends  must  not  be  paid 
out  of  capital,  but  the  payment  of  dividends,   notwithstanding 


784  TRUSTS,    POOLS   AND   CORPORATIONS 

the  contemporaneous  diminution  or  depreciation  of  that  part  of 
its  property  which  is  called  "fixed  capital  "  is  considered  legiti- 
mate and  cannot  be  prevented. 

A  trust  company  holding  stock,  which  during  the  last  business 
year  has  paid  50  per  cent  dividend,  but  before  the  end  of  the 
year  became  utterly  worthless,  may  include  the  50  per  cent  in 
its  yearly  profit,  without  deducting  a  penny  for  the  depreciation 
of  the  property  from  which  this  profit  was  derived.  This  is  not 
called  paying  dividends  out  of  capital.^  A  company,  owning  a 
mining  lease,  may  include  the  proceeds  of  the  minerals  extracted 
in  each  year  in  the  profit  of  that  year  and  value  the  mine  at  cost 
price  in  its  balance  sheet,  although  in  the  course  of  a  few  years 
the  mine  will  be  worthless  and  the  lease  will  have  expired. 
This  is  not  paying  dividends  out  of  capital.^  A  company  having 
paid  ^100,000  for  good  will  and  earning  an  income  of  ^looo 
with  every  prospect  of  earning  nothing,  or  less  than  nothing,  in 
the  following  year,  may  divide  the  profit  as  dividend,  whilst  the 
good  will  is  still  valued  at  ;^  100,000.  This  is  not  paying  divi- 
dends out  of  capital. 

The  distinction  between  the  depreciation  of  fixed  and  circu- 
lating capital,  which  is  the  basis  of  these  decisions,  is  unsound 
from  a  mercantile  point  of  view. 

Income  derived  from  any  source,  which  by  furnishing  the  in- 
come becomes  gradually  exhausted,  cannot  be  wholly  considered 
as  income.  It  is  partly  income  and  partly  re-payment  of  capital, 
like  a  terminable  annuity.  There  is  hardly  any  property,  classed 
as  fixed  capital,  which  is  not  of  a  wasting  nature.  In  some  cases 
the  wasting  process  is  very  slow,  in  some  cases  it  is  very  fast, 
but  the  rate  of  waste  can  be  generally  calculated  with  sufficient 
accuracy  to  enable  a  trader  to  write  off  the  proper  amount  for 
depreciation. 

If  it  was  really  correct  to  disregard  the  depreciation  of  the 
fixed  part  of  the  capital  in  the  calculation  of  the  profits,  the 
total  disappearance  of  such  property  would  not  have  to  be  con- 
sidered either ;  new  buildings  and  machines  would  have  to  be 
provided  and  their  cost  added  to  the  "  Buildings  and  Machinery 

1  Verner  v.  General,  &'c.,  Investment  Trust  (1894),  2  Ch.  239. 
-  Lee  V.  A^euchatel  Asphalte  Company,  41  Ch.  D.  i. 


GERMAN    COMPANY    LAW  78  5 

Account,"  but  the  demolished  buildings  and  the  disused  machin- 
ery could  still  be  valued  at  cost  price.  In  the  case  of  a  private 
partnership  such  a  mode  of  trading  would  invariably  lead  those 
who  adopt  it  into  the  bankruptcy  court,  if  it  were  persisted  in 
for  any  length  of  time,  but  in  the  case  of  a  private  partnership, 
the  fact  that  retiring  partners  must  from  time  to  time  be  paid  out 
on  the  basis  of  the  balance  sheet  of  the  last  year,  acts  as  an 
effective  check  against  the  overvaluation  of  permanent  invest- 
ments. 

In  the  case  of  companies  omitting  to  provide  for  the  waste, 
new  capital  must  of  course  be  required  from  time  to  time,  and 
such  new  capital  may  up  to  a  certain  point  be  furnished  by  a 
confiding  public  on  the  strength  of  the  forced  dividends,  but  the 
crash  will  inevitably  come  some  day. 

Another  objection  against  the  distinction  between  the  two 
kinds  of  capital  is  pointed  out  by  Mr.  Palmer  (one  of  the  most 
experienced  company  lawyers  in  this  country):  "  It  is  extremely 
difficult  to  determine  what  is  and  what  is  not  iixed  capital. 
Thus  shares  or  other  assets  are  sometimes  bought  by  a  company 
without  any  distinct  determination  whether  they  shall  be  kept  or 
resold  .  .  .  further  intentions  change.  Supposing  a  company 
formed  to  buy,  sell,  hold  by  way  of  investment,  and  deal  in 
shares  and  that  it  holds  some  shares  intending  at  the  time  to  sell, 
they  are  circulating  capital,  but  if  they  happen  to  fall  in  price, 
the  company  may  determine  to  keep  them  and  thereupon  they 
become  fixed  capital,  and  a  few  months  afterwards  the  company 
may  determine  to  sell  them  and  thereupon  they  again  become  cir- 
culating capital."   (Company  Precedents,  Part  I,7thed.,  page  540.) 

The  distinction  which  the  courts  have  made  between  circu- 
lating and  fixed  capital  and  the  rule  which  they  have  laid  down, 
according  to  which  a  company  may  continue  paying  dividends 
notwithstanding  the  gradual  disappearance  of  its  "  fixed  "  capi- 
tal, have  had  the  further  consec|uence,  that  the  notion  of  a  per- 
manent fund  on  which  the  creditors  of  a  limited  company  can 
rely,  has  been  entirely  abandoned.  This  was  shown  in  a  very 
recent  case,^  in  which  it  was  held  that  a  loss  shown  on  the 
working  of  a  particular  year,  for  which  no  reserve  is  available, 

1  In  re  Nalional  Bank  of  Wales  (1899),  2  Ch.  629,  669. 


786  TRUSTS,    POOLS   AND   CORPORATIONS 

need  not  be  replaced  from  the  profit  of  the  following  year.  The 
result  of  this,  translated  into  bookkeeping  language,  is,  that  a 
debit  balance  on  the  profit  and  loss  account  may  be  carried 
forward  as  an  asset  in  the  balance  sheet,  and  that,  whilst  this  is 
done,  dividends  may  be  divided  among  the  shareholders.  By 
judicious  bookkeeping  a  company  may  easily  arrange  to  have  a 
profit  in  each  alternate  year  and  a  loss  in  each  following  year. 
The  loss  diminishes  the  capital,  and  the  profit  goes  to  the  share- 
holders until  the  capital  is  exhausted.  A  law  which  allows  such 
a  state  of  things  turns  limited  liability  into  a  source  of  serious 
public  danger.  From  the  point  of  view  of  common  business 
prudence  the  following  rules  ought  to  be  strictly  maintained : 
a  sum  representing  the  depreciation  of  a  company's  property, 
whether  acquired  for  permanent  investment  or  for  the  purpose 
of  resale,  should  be  deducted  from  the  profits  in  each  year,  and 
either  credited  to  a  depreciation  account  or  deducted  from  the 
amount  at  which  such  property  was  previously  valued.  If  on 
the  working  »f  a  year  a  loss  is  shown  which  cannot  be  met  out 
of  any  reserve  fund,  that  loss  must  be  carried  forward  on  profit 
and  loss  account,  but  no  dividends  can  be  paid  until  such  debit 
balance  has  disappeared  from  the  books. 

Some  difficulty  arises  as  to  the  question.  What  constitutes 
depreciation  ?  Is  it  the  natural  wear  and  tear  and  the  gradual 
disappearance  of  the  object  only,  or  is  it  also  the  diminution  in 
market  or  selhng  value  produced  by  other  causes.?  In  this 
respect  the  distinction  between  fixed  and  circulating  capital 
offers  some  guidance.  . 

As  regards  property,  such  as  buildings  and  machinery,  bought 
or  constructed  for  the  purpose  of  being  retained  and  used  for  the 
permanent  purposes  of  the  company,  the  selling  value  is  not 
really  of  importance ;  the  durabiUty  or  usefulness  of  any  such 
property  is  not  affected  by  the  conditions  which  affect  the  price, 
at  which  it  can  be  sold,  and  the  company  is  not  any  poorer  be- 
cause it  is  unable  to  sell  such  property  at  cost  price ;  as  regards 
property  bought  or  manufactured  for  the  purpose  of  being  sold 
or  resold,  it  is  of  course  necessary  to  consider  the  market  price, 
which  is  the  only  tests  of  its  value.  The  two  classes  of  property 
just  mentioned  do  not  as  a  rule  exhaust  the  whole  of  a  company's 


GERMAN    COMPANY    LAW  -j?^-] 

property;  book  debts,  which  do  not  belonf,^  to  cithcT class,  are 
frequently  an  important  item.  It  is  generally  recognized  in  this 
country  that  a  reduction  ought  to  be  made  with  reference  to  bad 
and  doubtful  debts,  but  great  laxity  prevails  with  reference  to 
debts  payable  in  a  foreign  paper  currency  or  in  a  currency 
based  on  silver;  it  is  customary  for  bookkeeping  purposes  to 
convert  these  debts  into  sterling  currency  at  a  fixed  rate  of  ex- 
change, and  this  fixed  rate  is  sometimes  called  the  "  par  value  " 
—  as  if  there  could  be  a  par  value  between  a  metallic  currency 
and  a  paper  currency,  or  between  a  gold  currency  and  a  silver 
currency.  There  is,  then,  in  such  cases  a  tendency  to  disregard 
all  fluctuations  and  to  retain  the  old  rate  of  conversion,  al- 
though it  differs  materially  from  the  actual  rate.  In  cases 
where  such  debts  are  only  of  occasional  occurrence  this  is  not  so 
important,  but  in  the  case  of  companies  whose  principal  out- 
standings remain  permanently  in  foreign  countries,  the  conse- 
quences may  be  very  serious;  an  English  company  having 
outstandmgs  of  a  permanent  nature  in  Brazil  and  converting 
them  into  sterling  money  at  the  old  rate  of  2^d.,  whilst  the  pres- 
ent rate  is  about  M.,  is  doing  exactly  the  same  thing  as 
if  they  valued  their  outstanding  debts  at  their  full  value,  not- 
withstanding the  fact  that  two-thirds  of  the  same  were  known  to 
be  absolutely  irrecoverable;  yet  English  law  seems  to  allow 
this  system  of  bookkeeping,  and  the  payment  of  dividends  can- 
not be  prevented,  although  the  company's  capital  is  dwindling 
away  by  the  depreciation  of  the  currency  in  which  it  is  invested. 

As  regards  stock-exchange  securities  bought  for  permanent 
investment,  it  may  be  somewhat  inconsistent  to  prescribe  de- 
ductions in  respect  of  loss  of  market  value,  but  such  deductions 
are  prudent,  especially  in  cases  where  the  fall  in  the  market 
price  is  due  to  causes  materially  affecting  their  intrinsic  value. 
When,  e.g.,  a  stock-exchange  security  has  ceased  to  pay  dividends, 
it  ceases  to  serve  the  purpose  of  investment. 

The  German  law  proceeds  on  the  principles  for  which  I  have 
contended  in  the  foregoing  observations.  Section  261  enacts 
that  (subject  to  the  modifications  to  which  I  shall  have  to  refer) 
the  provisions  contained  in  the  mercantile  code  as  to  the  balance 
sheets  of  traders  generally  are  to  be  observed  ;  according  to  these 


/S8  TRUSTS,    POOLS   AND   CORPORATIONS 

provisions  all  assets  and  liabilities  must  be  taken  at  the  value, 
which  they  had  on  the  date,  as  from  which  the  balance  sheet  is 
made  out;  debts  must  be  taken  at  their  probable  value  and 
irrecoverable  debts  be  written  off  entirely.  The  modifications  in 
the  case  of  the  balance  sheets  of  companies  are  the  following  : 

(i)  Stock-exchange  securities  and  goods  having  a  stock- 
exchange  or  market  value  must  be  taken  at  such  stock-exchange 
or  market  price,  if  such  stock-exchange  or  market  price  is  below 
the  cost  price ;  in  any  other  case  they  are  to  be  taken  at  cost 
price. 

(2)  Other  assets  are  to  be  taken  at  a  price  not  exceeding  the 
cost  price. 

(3)  Buildings  and  plant  and  other  property  not  intended  to 
be  sold  or  resold,  and  being  used  for  the  permanent  purposes 
of  the  company's  business,  may,  notwithstanding  the  fact  that 
their  actual  value  is  smaller,  be  taken  at  cost  price,  provided  a 
sufficient  amount  is  written  off  or  placed  to  a  depreciation 
account,  by  which  the  loss  by  waste  or  wear  and  tear  is  provided 
for. 

(4)  Promotion  or  administration  expenses  may  not  be  included 
among  the  assets. 

(5)  The  amount  of  the  capital  and  of  all  reserve  and  depre- 
ciation funds  must  be  included  among  the  liabilities. 

(6)  The  profit  or  loss  resulting  from  a  comparison  of  the 
assets  with  the  liabiUties  must  be  stated  separately  at  the  end 
of  the  balance  sheet. 

It  will  be  noticed  from  these  rules  that  no  asset  may  be  valued 
above  cost  price,  even  in  a  case  where  the  actual  value  is  above 
cost  price ;  this  provision  does  not  appear  very  logical  at  first 
sight,  and  it  may  be  urged  that  it  is  just  as  wrong  to  under- 
value the  assets  as  to  overvalue  them ;  as  regards  the  latter 
observation  it  is  obvious  that  the  only  persons  damaged  by  an 
undervaluation  are  particular  classes  of  shareholders  or  directors 
or  managers,  whose  remunerations  vary  with  the  profits,  whilst 
an  overvaluation,  as  I  have  shown  above,  causes  an  injury, 
not  only  to  the  solidity  of  the  company  and  to  the  interests  of  its 
creditors,  but  also  to  its  competitors  and  the  public  generally, 
through  the  encouragement  which  it  gives  to  unsound  trading. 


GKRMAN    COMPANY    LAW  789 

There  is  therefore  much  more  inducement  to  provide  against 
overvaluation  and  to  disregard  the  risk  of  undervaluation  which, 
considering  the  many  temptations  in  favor  of  high  dividends, 
operating  on  the  directors  and  managers  of  a  company,  is  really 
not  very  serious.  The  illogical  nature  of  the  provisions  in  ques- 
tion cannot  be  entirely  denied,  but  it  was  thought  prudent  that 
a  company  should  not  pay  dividends  out  of  unrealized  profits, 
having  also  regard  to  the  fact  that  the  stock-exchange  price  or 
market  price  is  not  always  quite  genuine,  and  may  easily  be  sent 
up  by  fictitious  transactions  for  the  very  purpose  of  enabling 
a  company  to  value  securities  or  goods  at  a  price  producing  a 
profit  available  for  the  company's  dividends. 

One  of  the  consequences  of  the  rule,  that  no  asset  can  be 
taken  above  cost  price,  is  that  assets  which  were  acquired 
gratuitously  cannot  be  valued  at  anything.  Some  writers  have 
asked,  why  a  company  who  had  received  any  property  by  way 
of  gift  should  not  be  able  to  include  their  value  among  its 
assets ;  but  it  is  hardly  worth  while  to  consider  this  point,  as 
generous  benefactors,  who  give  away  their  savings  to  trading 
companies,  are  freaks  of  nature  which  need  not  trouble  the 
legislator's  mind. 

A  company  which  acquires  the  good  will  of  a  business  for 
valuable  consideration,  may  value  such  good  will  for  its  balance 
sheet  at  cost  price,  subject  to  the  proper  deduction  for  deprecia- 
tion, but  it  cannot  value  its  own  good  will  if  nothing  was  paid 
for  it.     (See  Ring,  pages  46,  602,  613.) 

The  German  code  does  not  lay  down  any  rule  as  to  the  manner 
in  which  depreciation  by  wear  and  tear  and  waste  ought  to  be 
calculated.  In  some  cases  the  natural  depreciation  is  obvious, 
as  in  the  cases  of  leases  or  patents  exi)iring  after  a  certain  number 
of  years.  The  rate  of  depreciation  in  the  case  of  buildings, 
machinery,  etc.,  can  also  be  easily  ascertained  with  the  advice 
of  experts  ;  in  other  cases,  common  sense  and  prudence  will 
usually  find  a  way  out  of  the  difficulty.  As  regards  good  will, 
depending  on  personal  efforts  and  qualities,  a  somewhat  rapid 
rate  of  depreciation  ought  to  be  allowed  for ;  where  good  will  is 
attached  to  particular  premises,  as  in  the  case  of  inns  and  hotels, 
its  value  is  not  generally  taken  as  a  separate  item,  but  included 


790  TRUSTS,    POOLS   AND    CORPORATIONS 

in  the  value  of  the  premises.  For  these  reasons  the  item  of 
good  will  is  not  frequently  seen  in  the  balance  sheets  of  German 
companies. 

Another  rule  of  law,  which  tends  to  the  preservation  of  the 
capital  of  German  companies,  is  contained  in  section  262,  which 
provides  that  a  reserve  is  to  be  formed  in  the  following  way : 
(i)  at  least  one-twentieth  part  of  the  net  profit  of  each  year  is  to 
be  credited  to  this  fund,  until  it  shall  have  reached  the  tenth 
part  of  the  company's  capital,  or  such  larger  part  of  such  capital, 
as  shall  be  provided  in  the  articles  ;  (2)  in  addition  to  this,  any 
net  premium  realized  by  the  issue  of  any  part  of  the  company's 
capital  must  be  placed  to  the  reserve  fund,  as  well  as  (3)  any 
amounts  paid  by  shareholders  in  consideration  of  any  preferen- 
tial rights  accorded  to  their  shares  (unless  such  payments  are 
used  for  the  purpose  of  making  good  any  special  losses). 

The  statutory  reserve  fund  cannot  be  used  for  the  payment  of 
dividends  in  bad  years,  but  separate  reserve  funds  may  be 
formed  for  that  purpose.     (Esser,  page  164;  Ring,  page  631.) 

The  provisions  which  I  have  hitherto  discussed  are  intended 
to  prevent  the  following  mischiefs  : 

(i)  The  watering  of  the  original  capital. 

(2)  The  dwindling  away  of  the  company's  assets  by  the 
omission  of  any  allowance  for  their  depreciation  in  the  balance 
sheets. 

They  cannot,  of  course,  prevent  the  gradual  disappearance  of 
the  company's  capital  by  losses  in  business  in  cases  in  which 
profits  cease  altogether,  but  there  are  provisions  which  prevent 
a  company  from  carrying  on  business  after  a  considerable  part 
of  its  assets  have  been  lost. 

It  is  provided  by  section  240 : 

(i)  That  if,  on  the  drawing  up  of  any  yearly  or  intermediate 
balance  sheet,  it  appears  that  one-half  of  the  company's  capital 
has  been  lost,  the  managing  board  must  immediately  convene 
a  general  meeting,  to  whom  the  state  of  facts  has  to  be  sub- 
mitted. 

(2)  That  in  the  case  of  the  insolvency  of  the  company,  and 
also  in  the  case  of  any  yearly  or  intermediate  balance  sheet, 
disclosing  the  fact,  that  the  liabilities  of  the  company  exceed  its 


GERMAN    COMPANY    LAW  791 

assets,  it  is  the  duty  of  the  managing  board  to  initiate  bank- 
ruptcy proceedings  without  delay.  A  disregard  of  this  provi- 
sion is  punishable  with  three  months'  imprisonment  and  a  fine 
(section  315-2). 

There  are  no  similar  rules  in  English  law  ;  in  the  case  of 
insolvency,  winding-up  proceedings  are  of  course  taken  as  a 
general  rule,  but  the  mere  fact  that  the  assets  are  insufficient  to 
pay  its  debts,  does  not  prevent  a  company  from  continuing 
business.  As  long  as  a  company  can  pay  its  way  by  the  use  of 
credit  or  otherwise,  so  long  it  can  continue  to  trade  in  this 
country  ;  in  some  lucky  cases,  this  may  enable  it  to  retrieve  its 
losses  and  to  start  a  more  prosperous  career,  but  in  the  larger 
number  of  instances,  a  company,  having  reached  such  a  low 
condition,  has  to  procure  accommodation  on  terms  so  onerous 
that  the  chances  of  profitable  trading  are  very  much  reduced. 
The  German  rule  is  therefore  preferable  in  the  interest  of 
creditors  and  of  the  general  public. 

The  German  law  on  stock-exchange  transactions  passed  in 
1896  has  no  such  wide  purposes  as  the  above-quoted  sections  of 
the  mercantile  code  relating  to  companies ;  its  only  object  was 
to  hinder  certain  kinds  of  stock-exchange  speculations  ;  in  so 
far  as  it  deals  with  shares  in  companies,  it  refers  not  merely  to 
shares  in  German  companies,  but  to  shares  generally,  nor  does  it 
refer  to  all  dealings  in  such  shares,  but  only  to  dealings  on 
any  authorized  stock  exchange.  In  England  the  stock  exchanges 
can  at  their  discretion  make  rules  as  to  the  conditions,  under 
which  a  settlement  or  quotation  is  granted  to  any  shares 
or  debentures  or  other  securities,  and  this  was  also  the  case 
in  Germany  prior  to  1896,  but  since  the  statute  of  that  date, 
the  stock-exchange  rules  are  partly  fixed  by  law.  The  pro- 
visions in  question  have  therefore  no  direct  connection  with 
company  law,  but  as  they  have  to  be  considered  on  the  forma- 
tion of  a  company,  whose  shares  are  to  be  dealt  in  on  the  stock 
exchanges,  and  also  on  any  increase  of  its  capital,  some  refer- 
ence must  be  made  to  them. 

The  rules  in  question  prescribe : 

(i)  The  compulsory  issue  of  a  prospectus,  the  authors  of 
which  are  under  a  specially  stringent  liability ; 


792  TRUSTS,    POOLS   AND    CORPORATIONS 

(2)  The  lapse  of  a  space  of  time  between  the  incorporation 
of  the  company  and  the  public  issue  of  its  shares ; 

(3)  The  fixing  of  a  minimum  capital  for  companies  whose 
shares  are  to  be  dealt  in  on  any  stock  exchange. 

As  regards  the  issue  of  a  prospectus,  it  is  provided  by  section 
38  of  the  statute,  that  before  any  security  is  admitted  for  the 
purpose  of  being  dealt  in  and  quoted  on  any  stock  exchange, 
a  prospectus  must  be  issued,  containing  all  information,  which 
is  of  any  importance  for  the  purpose  of  ascertaining  its  true 
value.  German  government  securities  are  exempted,  and  other 
securities  may  be  exempted  by  the  government  of  the  state  in 
which  the  application  is  made,  but  all  shares  in  companies, 
whether  incorporated  in  Germany  or  elsewhere,  are  included  in 
any  case. 

It  was  already  provided  by  the  mercantile  code,  that  persons 
issuing  a  prospectus  by  which  shares  are  offered  within  two 
years  from  the  incorporation  of  a  company,  are  Hable  in  damages 
in  respect  of  inaccuracies  or  omissions  in  such  prospectus.  This 
liability  can  be  enforced  by  the  company  only,  whilst  the  liability 
imposed  by  the  stock-exchange  statute  in  respect  to  misstate- 
ments in  the  prospectus  can  be  enforced  by  any  holder  of  the 
security  to  which  the  prospectus  refers.  According  to  section 
43  of  that  statute  all  persons  who  have  issued  or  directed  the 
issue  of  any  prospectus  containing  any  inaccurate  statement  on 
any  matter  affecting  the  value  of  the  security  are  jointly  and 
separately  liable  for  any  loss  caused  thereby,  in  so  far  as  they 
knew,  or  ought  in  the  absence  of  gross  carelessness  to  have 
known,  that  the  statement  was  incorrect.  In  the  same  way 
they  are  liable  in  respect  of  omissions  as  to  essential  facts,  if 
caused  by  them  knowingly  or  recklessly.  If  the  inaccuracy  or 
incompleteness  was  known  to  the  claimant  at  the  time  of  the 
purchase,  or  ought  to  have  been  known  to  him,  on  the  applica- 
tion of  the  care  usually  given  to  his  own  affairs,  he  loses  his 
claim  to  damages  or  restitution. 

As  regards  the  interval  of  time  which  must  elapse  before  a 
company's  shares  can  be  dealt  in  on  a  German  stock  exchange, 
it  is  provided  by  section  39  that  the  shares  of  any  undertaking 
which  has  been  converted  into  a  company  cannot  be  admitted 


GERMAN    COMPANY    LAW  793 

among  the  securities  negotiable  on  any  German  stock  exchange, 
unless  at  least  a  year  has  elapsed  from  the  date  of  the  registra- 
tion of  the  company,  and  unless  the  first  yearly  balance  sheet 
of  the  company  has  been  published  together  with  the  profit  and 
loss  account.  Power  is  given  to  the  state  government  of  the 
place  in  which  the  shares  are  to  be  dealt  in,  to  dispense  from 
this  rule  in  exceptional  cases.  It  will  be  noticed  that  this  close 
time  is  only  prescribed  in  the  case  of  companies  taking  over  an 
existing  business ;  the  shares  of  a  company  starting  a  new  busi- 
ness may  be  publicly  dealt  in  at  once.  The  wisdom  of  the  rule 
is  very  doubtful.  A  company  cannot  be  registered  before  its 
capital  is  fully  subscribed.  The  })romoters  must  therefore  hold 
the  whole  of  the  shares  for  at  least  a  year  and  probably  some 
months  longer,  as  in  most  cases  some  time  will  elapse  after  the 
end  of  the  year  before  the  balance  sheet  can  be  drawn  up  and 
published  ;  some  compensation  must,  of  course,  be  sought  for  the 
prolongation  of  the  risk  and  capital  outlay,  and  this  compensa- 
tion has,  of  course,  to  be  paid  by  the  pubhc.  On  the  other 
hand  the  safeguard  is  purely  imaginary.  By  judicious  manipu- 
lation profits  belonging  to  a  former  year  or  to  the  subsequent 
year  may  be  squeezed  into  the  critical  twelve  months,  so  as  to 
produce  a  specially  good  profit  and  loss  account,  and  the  idea 
that  the  pubUc  in  this  way  have  an  opj^ortunity  to  see  the  work- 
ing of  the  undertaking  before  they  are  asked  to  subscribe  to  it 
is  therefore  purely  imaginary. 

The  third  regulation  introduced  by  the  stock-exchange  statute 
is  intended  to  prevent  stock-exchange  transactions  in  the  shares 
of  companies  having  a  small  capital  only.  The  fixing  of  the 
minimum  capital  for  each  stock  exchange  is  left  to  the  federal 
council  by  section  42,  which  section  also  gives  power  to  the  same 
body  to  make  further  regulation  for  the  admission  of  securities 
to  any  stock  exchange. 

An  order  was  issued  by  the  federal  council  pursuant  to  this 
povv^er,  containing  the  following  provisions : 

(i)  The  minimum  capital  of  companies  whose  shares  are  to 
be  dealt  in  at  Berlin,  Hamburg  or  Frankfort  must  be  ;!^5o,ooo, 
whilst  for  all  other  stock  exchanges  a  minimum  capital  of 
^25,000  is  fixed. 


794  TRUSTS,    POOLS   AND   CORPORATIONS 

(2)  The  prospectus  must  state  {a)  the  name  of  the  company, 
[d)  the  clause  in  the  articles  or  resolution  authorizing  the  issue, 
{c)  the  purposes  for  which  the  proceeds  of  the  issue  are  to  be 
applied,  {d)  the  amount  of  the  total  issue,  the  amount  offered, 
and  the  amount  retained,  and  the  time  during  which  the  last- 
named  amount  is  to  be  retained  by  the  promoters. 

The  provisions  about  statements  in  prospectuses  and  dealings 
on  the  stock  exchanges  are  of  minor  importance  and  affect  a 
limited  class  only ;  those  relating  to  the  prevention  of  over- 
capitalization and  the  preservation  of  capital  affect  the  whole 
trade  of  the  country.  It  is  stated  on  good  authority  that  some 
branches  of  trade  (such  as  the  cycle  industry)  are  rapidly  going 
down  in  England  owing  to  the  fact  that  they  are  worked  by 
overcapitalized  companies.  This  will  show  that  the  reform  of 
company  law  has  other  objects  than  the  protection  of  careless 
persons  against  unsound  investments.  If  this  fact  could  be 
understood  and  realized  by  public  opinion,  it  would  be  seen  that 
measures  like  those  proposed  in  the  bill  which  is  now  before 
Parliament  touch  the  real  mischief  as  little  as  the  previous 
voluminous  legislation  on  the  subject. 

Ernest  Schuster 


XXIII 

THE    GERMAN    POTASH    SYNDICATE:    A    TYPICAL 

KARTELL! 

I.  Introductory 

THE  actual  source  of  the  world's  potash  supply  is  at  present 
in  the  deposits  of  potash  salts  found  in  northern  Germany. 
The  great  Stassfurt  potash  industry  is  based  on  the  presence  of 
those  salts  in  the  so-called  Magdeburg-Halberstadt  rock  salt  basin. 
Smaller  and  commercially  unimportant  are  the  deposits  of  the  same 
type  found  in  Galicia,  Chili,  Persia,  and  Eastern  Asia.  Germany 
thus  possesses  a  practically  complete  monopoly  of  potash  salts. 
Their  solubility  and  the  ease  with  which  they  can  be  converted 
into  concentrated  products  are  the  qualities  which  have  made  the 
world  envious  of  Germany's  possession  of  this  great  resource. 

The  story  of  the  discovery  and  development  of  these  deposits 
is  interesting.  For  hundreds  of  years  salt  springs  had  attracted 
attention  in  the  Stassfurt  region.  At  length,  after  a  number  of 
unsuccessful  attempts  in  the  decade  1850  to  i860,  rock  salt  was 
discovered  after  penetrating  several  strata  of  peculiar  bitter  salts. 
The  salts  designated  "  Abraumsalze  "  were  regarded  as  worth- 
less,—  an  obstruction  to  the  mining  of  rock  salt.  Professor 
Marchand  showed  that  they  contained  certain  valuable  elements, 
whereupon  the  Prussian  government  started  to  sink  a  shaft  in 
1858  for  the  purpose  of  mining  them.  Small  quantities  of  the 
crude  salts  were  subjected  to  a  process  of  concentration  and  sold 
for  industrial  uses.  The  success  which  attended  the  opening  of 
the  Prussian  mine  induced  the  Grand  Duchy  of  An  halt  to  open  a 
second  one,  which  began  operations  in  1862.  But  the  value  of 
the  "  Abraumsalze  "  was  immensely  enhanced  when,  after  a  series 

"^  Quarterly  Journal  of  Economics,  XXIII,  1913,  pp.  'i^off.  lam  indebted  to 
Professor  Tosdal  for  additions  and  emendations  bringing  the  subject  to  date. 
Copious  footnote  references,  except  for  such  new  material  as  is  added  to  the  original, 
have  been  omitted  from  this  scholarly  piece  of  work  on  account  of  space.  —  Ed. 

795 


796  TRUSTS,   POOLS  AND   CORPORATIONS 

of  painstaking  investigations,  Dr.  Frank,  assisted  by  Justus  von 
Liebig,  demonstrated  their  value  for  fertilizing  purposes.  These 
discoveries  inaugurated  a  new  era  for  the  Stassfurt  industry, 
which  now,  by  reason  of  its  lower  cost  of  production,  possessed 
a  great  advantage  over  other  sources  of  potash.  The  price  of 
muriate  of  potash,  which  ranged  from  $75  to  $100  per  metric 
ton  in  1862,  fell  to  one  third  that  price  in  1864  and  1865. 

At  present  only  the  potash  salts  with  the  highest  potash 
content  are  mined.  Of  these,  the  most  important  are  carnallite, 
kainite,  hard  salts,  and  sylvin.  Carnalhte  is  a  hydrated  double 
salt  of  muriate  of  potash  and  magnesium  chloride,  used  especially 
as  the  basic  salt  for  concentration  into  muriate  of  potash.  Kainite 
is  also  a  double  salt  containing  potash  in  the  form  of  sulphates 
and  chlorides  of  potash  mixed  with  sulphates  and  chlorides  of 
magnesium.  It  is  more  valuable  than  carnallite  and  can  be  used 
directly  as  a  fertilizer.  Hard  salts  are  a  mixture  of  kieserite  and 
kainite  with  sylvin.  Sylvin  is  the  most  valuable  of  all  the  crude 
salts.  Like  hard  salts  it  finds  its  chief  employment  in  industry, 
while  kainite  is  used  chiefly  in  agriculture. 

In  the  export  trade  the  concentrated  salts  play  a  much  more 
important  part  than  the  crude  salts.  Muriate  of  potash  (KCl)  is 
the  most  important,  being  used  in  immense  quantities  as  a  fer- 
tilizer for  sugar  beet,  cotton,  and  other  crops.  Sulphate  of  potash 
(K4SO2)  is  manufactured  in  smaller  quantities,  of  which  a  large 
part  is  absorbed  by  tobacco  culture  in  the  United  States.  Such 
potash  products  as  carbonate  of  potash,  manure  salts,  and  the  crude 
salts,  bergkieserit,  sylvinite,  schonite,  are  of  less  importance. 

The  annual  output  of  the  German  potash  industry  shows  an 
extraordinary  increase  during  the  past  half  century,  as  is  indi- 
cated by  the  following  table  : 

OUTPUT   OF   POTASH  SALTS 

In  iooo  Metric  Tons  Value  in  iooo  Marks 

1862 19.8  340 

1870 291.9  2,628 

1880 665.9  6,783 

1890 1274.9  16,500 

1900 3050.6  39)111 

1905 5043-5  60,391 

1909 7042.0  81,655 


THE    GERMAN    POTASH   SYNDICATE  797 

The  production  of  muriate  of  potash  also  shows  hii".i;e  in- 
creases. A  significant  change  in  the  demand  appears  in  the 
fact  that,  whereas  in  1861  no  potash  was  sold  for  agricultural 
purposes,  by  1880  agriculture  took  42.5  per  cent  of  the  total 
output  and  in  1905,  84.5  per  cent.  Although  the  consumption 
of  potash  in  the  glass,  soap,  and  other  industries  has  increased 
in  absolute  amounts  from  year  to  year,  it  forms  relatively  a 
steadily  diminishing  portion. 

The  United  States  is  the  largest  consumer  of  potash  outside 
of  Germany  itself.  The  increase  in  the  importation  of  potash 
during  the  past  twenty-five  years  has  been  marked.  Owing  to 
the  frequent  changes  in  classification  it  is  difficult  to  obtain  a 
comparable  set  of  figures ;  but  for  muriate  of  potash,  the  most 
important  of  the  products  imported,  the  increase  since  1884  has 
been  nearly  tenfold.  Sulphate  of  potash  and  manure  salts  show 
a  slower  but  still  significant  growth.  Nevertheless,  the  Ameri- 
can consumption  per  acre  of  tillable  land  is  as  yet  only  one 
eighth  of  the  consumption  in  Germany.  Three  fourths  of  the 
potash  imported  into  the  United  States  is  used  in  the  Atlantic 
and  South  Central  states,  in  the  form  of  commercial  fertilizer,  of 
which  potash  is  a  constituent. 

The  potash  trade  in  the  United  States  is  handled  by  the  New 
York  agency  of  the  potash  syndicate.  Several  groups  of  buyers 
may  be  distinguished.  First,  the  powerful  fertilizer  manufactur- 
ing corporations,  of  which  the  largest  are  the  American  Agricul- 
tural Chemical  Company,  of  New  York,  and  the  Virginia-Carolina 
Chemical  Company,  of  Richmond,  both  organized  in  the  late 
nineties  as  combinations  of  existing  fertilizer  concerns.  To  these 
was  added,  in  1909,  the  International  Agricultural  Corporation,  a 
result  of  the  developments  of  1906-1909,  which  led  the  so-called 
independents  to  combine.  The  Virginia  company  owns  a  con- 
trolling interest  in  the  Einigkeit  potash  mine  in  Germany,  while 
up  to  the  end  of  191 2,  the  International  owned  the  Sollstedt 
mine.  A  second  group  of  potash  buyers  is  formed  by  the  large 
packing  houses,  which  buy  potash  for  their  fertilizer  plants,  and 
the  smaller  independent  fertilizer  manufacturers.  Finally  there 
are  manufacturers  of  chemicals,  dry  mixers  and  jobbers  of  fer- 
tiUzer,  farmers'  associations,  and  local  dealers. 


798  TRUSTS,   POOLS  AND   CORPORATIONS 

II.    Early  Agreements.     The  First  Syndicate  (1889-1898) 

Following  the  entry  of  the  two  fiscal  potash  mines  into  the 
field  of  potash  production,  the  factories  established  by  private 
individuals  for  the  manufacture  and  concentration  of  the  crude 
salts  began  in  1864  and  1865  to  outstrip  the  capacity  of  the  mar- 
ket to  absorb  their  products.  The  number  of  enterprises  had 
increased  from  three  in  1862,  to  eleven  in  1863  and  eighteen  in 
1865.  Commercial  depression  and  overproduction  resulted  in 
the  failure  of  nearly  a  third  of  the  companies  in  the  latter  year. 
Rapid  recovery  and  subsequent  prosperity  again  brought  about, 
in  1 87 1  and  1872,  an  increase  of  manufacturing  facilities  not 
warranted  by  demand.  The  decline  in  the  price  of  muriate  of 
potash  which  began  in  1872,  and  lasted  until  in  1874,  put  a  num- 
ber of  factories  out  of  business.  The  pressure  toward  some  sort 
of  combination  led  to  an  agreement  between  the  manufacturers  in 
1876,  whereby  prices  were  to  be  fixed  weekly  by  a  commission. 
With  the  resumption  of  prosperity  in  the  following  year,  several 
of  the  members  withdrew  and  the  agreement  came  to  an  end. 

In  contrast,  the  development  of  the  potash  mines  up  to  1875 
was  one  of  steady  progress.  But  in  that  year,  a  third  mine  at 
Westeregeln,  and  a  fourth,  New-Stassfurt,  in  1877,  deprived  the 
fiscal  mines  of  Prussia  and  Anhalt  of  their  monopoly  in  the  pro- 
duction of  crude  salts.  In  view  of  the  fact  that  any  one  of  the 
four  mines  could,  if  necessary,  supply  the  total  demand,  the 
fiscal  mines  did  not  relish  the  idea  of  unrestrained  competition. 
The  expected  happened.  The  alternative  of  free  competition 
and  low  prices,  sure  to  entail  serious  losses  upon  all  of  the 
mines,  and  eventually  ruin  to  some,  was  rejected  for  combination. 
With  the  active  cooperation  of  the  Prussian  fisc,  the  four  mines, 
Stassfurt  (Prussian  fisc),  Leopoldshall  (Anhalt  fisc),  New-Stass- 
furt and  Westeregeln,  agreed  to  limit  for  five  years  the  output 
of  carnallite  intended  for  concentration  into  refined  salts.  Cer- 
tain provisions  as  to  the  price  of  crude  salts  were  included,  but 
it  was  left  open  to  the  factories  to  fix  the  prices  for  concentrated 
products.  Between  the  three  kainite-producing  mines  a  similar 
agreement  was  concluded  in  April,  1879,  fixing  prices  and  the 
total  amount  to  be  mined  by  each  member. 


I 


THE    GERMAN    POTASH   SYNDICATE  799 

The  success  of  the  potash  mines  was  an  incentive  to  the  invest- 
ment of  capital  in  new  enterprises  of  the  same  sort.  A  mine  at 
Aschersleben  began  operations  in  1882,  and  threatened  to  rob 
those  already  in  the  field  of  their  market.  Westeregeln's  notice 
in  June,  1883,  of  withdrawal  from  the  carnallite  agreement  led  to 
its  dissolution  in  October.  However,  after  some  negotiation 
efforts  at  securing  a  new  agreement  were  successful,  and  on 
October  21,  1883,  representatives  of  the  five  mines  signed  con- 
tracts renewing  the  previous  one.  As  the  Aschersleben  mine 
also  produced  kainite,  the  necessary  revision  of  the  kainite 
agreement  was  made  and  Aschersleben  became  a  member  in 
1884. 

At  the  time  a  seventh  mine,  Hercynia  at  Vienenburg,  became 
a  party  to  the  carnallite  agreement,  several  changes  were  made. 
Special  privileges,  that  of  fixing  the  price  of  crude  salts  sold  to 
the  factories,  and  the  right  to  veto  a  reduction  or  increase  in  al- 
lotments, were  conceded  to  the  Prussian  government.  The  price- 
fixing  privilege  was  of  small  importance  except  to  the  fiscal 
mines,  since  the  private  mines  supplied  only  their  own  factories 
operated  in  connection  with  the  mines. 

Shortly  after  the  renewal  of  the  carnallite  agreement  in  1883, 
the  manufacturers  of  muriate  of  potash  formed  an  association 
for  marketing  concentrated  products.  As  the  supply  of  raw 
material  was  fixed  by  the  mine  owners,  no  restriction  of  produc- 
tion was  necessary.  The  organization,  somewhat  more  elaborate 
than  in  previous  agreements,  provided  for  a  central  sales  office 
through  which  all  the  manufacturers  agreed  to  market  their 
products.  The  manager  of  the  sales  office,  acting  according  to 
instructions  formulated  by  a  representative  commission  of  manu- 
facturers, effected  sales,  received  orders,  and  assigned  them  to 
the  members  as  nearly  as  possible  in  proportion  to  the  quantities 
of  raw  material  assigned  to  them  by  the  mine  owners'  associa- 
tion. Occasional  excesses  or  deficits  were  to  be  adjusted  semi- 
annually. The  commission  fixed  the  price  of  muriate  of  potash, 
but  could  raise  it  only  with  the  consent  of  the  Prussian  fisc. 

The  potash  industry  prospered  during  the  decade  following 
the  formation  of  the  first  agreement.  The  combination,  includ- 
ing as  it  did  all  the  producers,  had  been  able  to  keep  up  prices 


800  TRUSTS,   POOLS  AND   CORPORATIONS 

and,  at  the  same  time,  increase  the  demand  for  potash.  The 
addition  of  three  new  mines  had  not  been  a  disturbing  factor. 
The  advantages  of  regulation  had  become  too  evident  to  allow  a 
return  of  free  competition  upon  the  expiration  of  existing  agree- 
ments. Strengthened  by  observation  of  the  results  of  competi- 
tion which  had  taken  place  between  the  pooled  and  independent 
muriate  factories  in  the  American  market,  the  opinion  became 
prevalent  that  a  renewal  of  existing  contracts  was  insufficient  and 
that  all  products,  crude  and  refined,  should  be  included  in  a  new 
and  firmer  agreement.  Finally  there  was  formed,  during  Sep- 
tember and  October,  1888,  the  first  all-embracing  potash  Kartell 
or  syndicate,  upon  the  basis  of  seven  separate  contracts  or  agree- 
ments, the  first  four  of  which  related  to  crude  salts,  the  last  three 
to  refined  products. 

The  members  of  the  syndicate  proper  were  mine  owners  ex- 
clusively. Owners  of  special  factories  (/.^.  factories  not  operated 
in  connection  with  any  particular  mine)  who  were  members  of 
the  muriate  agreement  of  1883  were  compelled  to  observe  the 
conditions  prescribed  in  the  last  three  contracts  as  to  the  pro- 
duction and  sale  of  concentrated  products.  In  return,  they  were 
assured  an  exclusive  supply  of  raw  material  for  the  greater  part 
of  the  syndicate's  duration  of  ten  years,  with  the  warning  that 
they  would  be  cut  off  from  all  supplies  if  they  were  found  to  en- 
courage the  establishment  of  a  new  potash  mine.  The  output 
of  the  special  factories  had  been  steadily  decreasing,  and  when 
the  Prussian  fisc,  which  had  operated  no  factory  of  its  own,  with- 
drew formally  from  the  existing  agreements  to  establish  a  factory 
in  1887,  the  business  of  the  special  factories  had  decreased  to 
such  an  extent  that  they  offered  to  pay  the  Anhalt  fisc  higher 
than  current  prices  in  order  to  secure  crude  salts.  Consequently 
in  1888,  the  assurance  of  raw  material  was  welcome  to  them. 

The  first  two  of  the  seven  contracts  (designated  la  and  11^) 
dealt  with  carnallite.  A  commission  of  representatives  from  the 
seven  mines  fixed  the  total  amount  to  be  mined  and  allotted  it 
by  percentage  shares  to  the  individual  mines.  Minor  provisions 
regulated  the  raising  and  lowering  of  quotas.  Kainite  contain- 
ing 12.4  per  cent  pure  potash  was  chosen  as  a  basis  for  the  cal- 
culation of  allotments.     The  kainite  contracts  {Ha  and  II^!;)  dealt 


THE    GERMAN    POTASH    SYNDICATE  8oi 

similarly  with  the  allotment  of  production,  but  since  kainite,  un- 
like carnallite,  is  sold  in  its  crude  state  for  agricultural  purposes, 
its  sale  was  placed  in  the  charge  of  a  central  sales  office,  the  pro- 
ducers agreeing  to  make  no  independent  sales,  to  observe  the 
terms  of  sale  fixed  by  the  central  office,  and  to  make  regular  and 
accurate  reports.  Selling  prices  were  fixed  by  a  committee  of 
the  associated  mine  owners,  subject,  however,  to  certain  privileges 
conceded  to  the  Prussian  Minister  of  Commerce  and  Industry. 
He  was  given  the  right  to  name  special  prices  for  the  supply 
used  in  domestic  agriculture,  whenever  it  should  seem  advisable 
in  order  to  increase  sales,  or  necessary  for  the  welfare  of  German 
agriculture.  The  detailed  provisions  for  the  temporary  transfer 
of  allotments  during  disturbances  in  operation  need  not  be 
mentioned  here. 

The  last  three  contracts  (I^,  Id,  Ilr)  had  substantially  the  same 
aim  as  the  others,  —  the  elimination  of  competition  and  the  pre- 
vention of  overproduction.  The  special  factories,  together  with 
the  factories  of  the  mine  owners,  were  all  subjected  to  the  restric- 
tions of  a  central  sales  agency,  the  orders  being  assigned  and 
adjustments  made  as  under  former  agreements.  Prices  and 
rebates  were  fixed  by  a  general  commission,  which  was  also 
empowered  to  dispose  of  quantities  of  muriate  of  potash,  at 
specially  low  prices,  or  gratis,  for  propaganda  purposes  to 
chemists  for  experiment,  for  exhibitions,  for  the  support  of 
agricultural  trade  papers  and  the  like.  This  was  the  beginning 
of  a  type  of  endeavor  which  has  been  most  effective. 

Since  the  administration  of  each  of  the  basic  agreements  was 
in  the  charge  of  a  separate  committee,  the  management  proved 
so  unwieldy  as  to  necessitate  a  reorganization  in  189 1.  A  cen- 
tralized administration  was  introduced.  The  general  manage- 
ment, of  which  the  representative  of  the  Prussian  fisal  mine  was 
ex  officio  chairman,  obtained  broader  powers ;  while  a  general 
commission,  consisting  of  one  representative  from  each  mine, 
performed  the  duties  of  the  several  committees  under  the  old 
arrangement,  fixing  prices,  deciding  important  questions  of  or- 
ganization and  distribution,  and  imposing  penalties  for  breach  of 
contract.  The  general  or  business  management  was  divided  into 
three  departments,  each  headed  by  an  assistant  director.     One 


8o2  TRUSTS,   POOLS   AND   CORPORATIONS 

of  these  took  charge  of  the  domestic  business  and  the  transac- 
tions between  the  syndicate  and  the  individual  mines ;  another 
took  the  export  trade;  and  the  third,  the  statistical  work  and  the 
propaganda  movement.  As  before,  orders  were  received  and 
assigned  and  adjustments  made  at  the  central  offices.  The 
syndicate,  which  now  styled  itself  "  Verkaufssyndikat  zu  Leopold- 
shall-Stassfurt,"  established  agencies  in  several  German  and 
foreign  cities,  while  in  others  it  gave  certain  dealers  exclusive 
control.  Up  to  1893,  the  American  trade  had  been  controlled 
by  two  exclusive  dealers,  but  the  syndicate's  dissatisfaction  with 
the  growth  of  the  American  demand  under  their  direction  led 
to  the  estabHshment  of  a  special  agency  in  New  York. 

During  this  syndicate  period  ( 1 888- 1 898)  five  new  mines  became 
members  of  the  syndicate.  The  fever  of  speculation  from.  1895 
to  1898  did  not  pass  the  potash  industry  by.  It  is  said  that 
over  a  hundred  boring  companies  were  in  operation  and  many 
shafts  were  sunk.  The  failure  of  not  a  few  companies,  and  the 
depression  at  the  close  of  the  decade,  led  to  the  abandonment 
of  many  of  the  enterprises.  But  in  general  the  syndicate  suc- 
ceeded in  increasing  the  sales  of  potash  and  in  steadying  the 
market.  Though  it  was  not  able  to  avoid  overproduction 
entirely  during  the  difficult  years,  1 892-1 893,  it  prevented  the 
industry  from  experiencing  the  worst  effects.  On  the  ground 
that  the  existing  facilities  were  too  large,  the  Prussian  govern- 
ment advocated  a  restriction  upon  the  estabHshment  of  new 
mines.  The  policy  of  restriction  did  not  appeal  to  the  legislature 
at  that  time.  The  debate  on  the  i8th  and  19th  of  April,  1894, 
in  the  Abgeordnetenhaus,  was  concerned  chiefly  with  the 
question  of  whether  or  not  the  Prussian  fisc  would  have  influence 
enough,  should  restriction  be  adopted,  to  secure  lower  prices 
for  domestic  industry  and  agriculture ;  it  ended  with  the  rejec- 
tion of  a  proposed  law. 

III.    The  Second  and  Third  Syndicates  (1898-1904) 

As  might  be  expected,  little  opposition  developed  when  the 
question  of  the  continuance  of  the  syndicate  came  up  for 
decision  in  1898.     The  agreement  of  that  year  differed  from  the 


THE    GERMAN    POTASH    SYNDICATE  803 

preceding  one  in  that  a  single  comprehensive  contract  took  the 
place  of  seven.  The  products  were  divided  into  four  groups 
according  to  their  potash  content.  The  management  of  the 
syndicate  was  given  greater  freedom  and  authority  by  the 
adoption  of  the  stock  company  form.  Instead  of  a  commission 
consisting  of  a  representative  from  each  mine,  a  supervisory 
council  of  fewer  members  was  created.  During  the  three-year 
existence  of  the  second  syndicate,  five  mines  were  added  to  the 
membership. 

Again,  in  1901,  renewal  of  the  .syndicate  upon  substantially 
the  same  basis  as  in  1898  was  effected  without  difficulty.  The 
opposition  which  was  manifested  concerned  mainly  the  question 
of  the  admission  of  new  mines  into  the  syndicate.  It  was 
becoming  apparent  that  the  number  of  mines  was  increasing 
more  rapidly  than  it  was  possible  for  the  syndicate  to  increase 
sales. 

After  1901,  however,  the  situation  became  serious.  The  de- 
pression of  1 90 1  and  1902  resulted  in  a  decrease  of  the  syn- 
dicate's business,  the  effects  of  which  were  accentuated  by  the 
entrance  of  new  mines.  From  seven  mines  in  1888  and  twelve 
in  1898,  the  number  of  producing  mines  had  risen  to  twenty- 
four  in  1902  and  twenty-eight  in  1903.  The  necessity  of  bring- 
ing all  these  into  the  syndicate,  the  unwillingness  of  the  older 
mines  to  give  up  any  part  of  their  allotments  in  order  to  make 
room  for  new  members,  and  the  high  demands  of  prospective 
members  rendered  the  allocation  of  quotas  a  progressively  diffi- 
cult task.  The  market  from  1902  to  1904  was  unsettled.  Both 
dealers  and  consumers  delayed  buying,  toward  the  last,  in  the 
hope  of  obtaining  lower  prices  in  the  event  of  the  dissolution  of 
the  syndicate. 

IV.    The  Syndicate  of  1904- 1909 

Early  in  1903,  dealings  of  American  potash  purchasers  with 
some  of  the  newer  mines  which  had  not  yet  entered  the  syndi- 
cate gave  rise  to  rumors,  very  disturbing  to  Germans,  that  the 
Americans  intended  to  buy  up  potash  properties  and  supply 
their  own  demands.     The  subsequent  entry  of  these  mines  into 


804  TRUSTS,   POOLS  AND   CORPORATIONS 

the  syndicate  quieted  the  fears  for  a  short  time,  only  to  be  again 
aroused  by  the  report  that  the  Virginia-Carolina  Chemical  Com- 
pany was  attempting  through  the  Heldburg  Company  to  obtain 
control  of  the  Wintershall  mine,  in  addition  to  its  ownership  of 
a  controUing  interest  in  the  Einigkeit  mine.  Though  this  re- 
port was  denounced  as  false  it  caused  much  resentment.  It 
was  said  that  the  loss  of  the  American  market,  which  amounted 
to  one  half  of  the  total  export  trade,  would  be  a  calamity  to  the 
industry  as  well  as  lead  to  wanton  dissipation  of  the  natural 
resource. 

At  the  instance  of  the  Prussian  fisc,  negotiations  aiming  at 
the  continuance  of  the  syndicate,  which  expired  in  1904,  were 
taken  up  early,  the  first  general  meeting  being  called  for  May 
8,  1903.  This  early  action,  hastened  it  is  said  by  the  reports  of 
the  American  "invasion,"  recognized  that  the  renewal  would 
not  be  effected  as  easily  as  on  previous  occasions.  Although 
the  syndicate  included  all  the  operating  mines  (after  the  entrance 
of  the  mines  Hohenfels,  Kaiserroda,  Einigkeit,  and  Bleicheroda, 
in  January,  1903)  this  complete  control  was  of  short  duration. 
Moreover  the  internal  composition  of  the  syndicate  had  been 
undergoing  a  change  by  the  division  of  the  members  into  two 
hostile  groups,  one  composed  of  the  older  mines  having  com- 
paratively large  quotas  and  unwilUng  to  submit  to  the  decreases 
attendant  upon  the  increase  of  syndicate  membership,  and  the 
other  made  up  of  newer  mines  demanding  larger  quotas  in  some 
proportion  to  their  alleged  capacities.  According  to  a  clause  in 
the  existing  agreement,  syndicate  members  were  free  after  June 
30,  1904,  if  renewal  had  not  been  accomplished  by  that  date,  to 
execute  independent  contracts  for  deUvery  after  December  31, 
1904.  Consequently,  all  efforts  were  directed  toward  effecting 
a  renewal  by  July  i,  1904,  in  order  to  avoid  the  complications 
which  would  inevitably  arise  should  independent  contracts  be 
made. 

At  the  general  meeting.  May  8,  1903,  it  was  voted  that  the 
continuance  of  the  syndicate  was  desirable  and  that  the  invasion 
of  American  capital  must  by  all  means  be  prevented.  Two 
committees  were  chosen,  one  to  discuss  the  draft  of  a  new 
agreement,  the  other  to  take  up  the  allotment  question.     Fol- 


THE   GERMAN    POTASH   SYNDICATE  805 

lowing  the  admission  of  three  new  mines  into  the  syndicate,  the 
general  meeting  on  November  3  took  up  the  discussion  of  the 
proposed  basis  for  renewal.  It  was  soon  discovered  that  the 
chief  point  of  dispute  was  the  allotment  question.  A  special 
committee,  instructed  to  report  at  the  ne.xt  general  meeting,  was 
chosen  to  attempt  to  induce  the  various  mines  to  agree  to  a  com- 
promise table  of  divisions.  The  committee  found  it  impossible 
to  accomplish  anything.  No  less  than  eighteen  out  of  twenty- 
eight  mines  raised  objections  to  a  table  of  allotments  submitted 
for  inspection  in  November. 

The  second  general  meeting  of  syndicate  members  on  January 
18,  1904,  showed  a  sharp  division  on  the  allotment  question  be- 
tween the  two  groups  of  mines.  The  group  of  older  mines  de- 
clared it  would  not  submit  to  any  further  reduction  of  allotments 
and  demanded  that  the  younger  mines  agree  among  themselves 
as  to  the  division  of  the  balance  of  the  total  output.  The  latter 
elected  a  committee  to  consider  the  matter,  but  the  high  de- 
mands of  certain  mines  precluded  a  settlement.  Two  general 
meetings,  February  8  and  29,  did  not  alter  the  state  of  affairs. 
After  the  mine  Burbach  gave  formal  notice  of  its  intended  with- 
drawal, some  of  the  mines  were  deprived  of  the  hope  they  had 
entertained  that  the  agreement  would  be  renewed  according  to 
a  provision  inserted  in  the  contract  that,  should  no  member  give 
notice  of  withdrawal  before  June  30,  renewal  would  automati- 
cally take  place.  Nevertheless  the  deadlock  continued,  each 
side  accusing  the  other  of  a  shameful  display  of  selfishness. 

Finally  on  June  27,  a  meeting  called  by  the  Prussian  fisc  con- 
vened in  a  sort  of  fatalistic  hope  that  efforts  would  be  success- 
ful. By  June  30  minor  questions  had  been  disposed  of  and  one 
by  one  the  mines  agreed  to  quotas  assigned  to  them  by  a  special 
commission.  The  government  mines  finally  agreed  to  make 
concessions,  but  the  obstinacy  of  the  representative  of  the  Hed- 
wigsburg  mine  brought  the  negotiations  on  that  day  to  naught. 
The  mine  owners  were  brought  together  the  next  day  ;  Hed wigs- 
burg  expressed  willingness  to  enter  the  syndicate  upon  the 
somewhat  more  favorable  terms  offered.  Hohenfels  had,  in  the 
interim,  contracted  with  several  American  firms  to  deliver  potash 
at  prices  considerably  lower  than  those  quoted  by  the  syndicate. 


8o6  TRUSTS,   POOLS  AND   CORPORATIONS 

This  was  adjusted,  the  syndicate  assuming  the  contracts,   and 
upon  July  first,  the  new  syndicate  was  organized. 

Upon  August  II,  the  new  syndicate  (Kahsyndikat,  G.  m. 
b.  H.)  was  entered  in  the  commercial  register  at  Bernburg  as  a 
limited  liability  company  with  a  paid-up  capital  stock  of  400,- 
000  marks  entirely  owned  by  the  members  of  the  syndicate. 
The  adoption  of  the  company  form,  merely  a  device  to  give 
juristic  personality  to  the  Kartell,  was  due  to  the  desire  to  secure 
still  firmer  organization  than  had  hitherto  been  possible.  Potash 
products  were  regrouped  into  five  groups,  the  first  three  of 
which  included  certain  crude,  mixed,  and  concentrated  salts,  the 
other  two,  crude  salts.  As  before,  members  of  the  syndicate 
bound  themselves  to  place  the  entire  output  of  their  estabUsh- 
ments  at  the  disposition  of  the  central  office  which  received  and 
distributed  orders.  To  increase  the  effectiveness  of  the  syndi- 
cate's propaganda  work,  all  individual  trade  marks  were  given 
up. 

The  administration  of  the  syndicate  was  intrusted  to  three 
bodies  :  the  general  assembly  (Generalversammlung)  consisting 
of  a  representative  from  each  mine ;  the  supervisory  council 
(Aufsichtsrat) ;  and  the  syndicate  management  (Syndikatsvor- 
stand).  The  general  assembly  was  empowered  to  choose  eight 
members  of  the  council,  to  declare  dividends,  to  determine  the 
terms  of  sale,  and,  with  some  qualification,  to  amend  the  articles 
of  the  company.  Any  change  in  the  prices  of  certain  products, 
as  well  as  any  change  affecting  the  privileges  of  the  Prussian 
Minister  of  Commerce,  required  the  votes  of  the  government 
representatives  to  be  among  those  concurring.  Upon  the  super- 
visory council,  of  which  the  chairman  was  to  be  chosen  by  the 
Prussian  Minister  of  Commerce  and  Industry,  devolved  the  duty 
of  selecting  the  officials  composing  the  business  management, 
and  of  exercising  control  over  them.  The  syndicate  managing 
staff  (Geschaftsvorstand)  consisted  of  a  Generaldirektor,  with 
three  subordinate  directors  each  in  charge  of  one  of  the  three 
departments  into  which  the  business  was  divided :  namely,  the 
central  department,  the  agricultural  bureau,  and  the  business 
management  proper,  which  again  fell  into  four  divisions  dealing 
with   (a)  crude  salts,  (d)  concentrated  products,  (c)  American 


THP:   GERMAN    POTASH    SYNDICATE  807 

trade,  {d)  transportation.  The  Vorstand  fixed  pnccs  annually, 
subject  to  the  approval  of  the  supervisory  committee,  upon  the 
basis  of  kainite  containing  12.4  per  cent  pure  potash,  the  other 
prices  being  computed  therefrom  according  to  potash  content. 
Export  prices  were  to  be  higher  for  all  except  a  few  products 
with  low  potash  content, — an  exception  of  little  importance 
since  such  products  cannot  be  economically  transported.  By 
other  provisions,  the  approval  of  the  Prussian  Minister  of  Com- 
merce was  made  necessary  for  raising  the  base  price.  The 
right  to  quote  special  prices  for  German  agricultural  consump- 
tion was  retained. 

An  arbitration  board  was  established  for  the  settlement  of 
disputes.  Penalties  for  breach  of  contract  took  the  form  of 
fines  ranging  in  amount  from  100  to  300,000  marks.  Appeal 
from  the  decision  of  the  supervisory  council  was  permitted.  As 
security  for  the  observance  of  contracts,  each  mine,  except  the 
fiscal  establishments,  was  required  to  deposit  300,000  marks  to 
the  credit  of  the  syndicate. 

The  fatal  weakness  of  the  syndicate  contract  lay  in  the  fact 
that  in  it  were  incorporated  no  provisions  for  the  admission  of 
new  members.  In  the  anxiety  lest  the  syndicate  should  not  be 
continued,  a  most  important  question  was  glossed  over  and 
finally  left  unsettled.  This  defect  was  destined  to  cause  con- 
stant difificulties. 

The  period  of  calm  which  followed  the  formation  of  the  syn- 
dicate in  1904  was  of  short  duration.  The  establishment  of  new 
mines,  their  increasing  reluctance  to  enter  the  syndicate,  and 
the  difficulties  and  disturbance  accompanying  become  the  main 
features  in  the  history  of  the  potash  industry.  The  syndicate 
led  a  precarious  existence,  threatened  with  destruction  more 
than  once  in  the  course  of  the  protracted  negotiations  connected 
with  the  entrance  of  certain  mines  into  the  organization. 

When  possible,  the  syndicate  secured  the  assent  of  a  pros- 
pective member  to  a  provisional  agreement  and  assigned  a 
quota  tentatively.  Then  began  a  process  of  higgling,  the  new 
mine  demanding  a  high  quota  with  the  hope  of  obtaining  even- 
tually about  what  was  desired,  and  occasionally  enforcing  its  de- 
mands by  threatening,  or  actually  making,  independent  sales  at 


8o8  TRUSTS,   POOLS  AND   CORPORATIONS 

low  prices.  The  syndicate,  on  the  other  hand,  commenced  by 
offering  a  low  quota  with  the  intention  of  raising  it  if  necessary. 
The  fact  that  since  1900  the  average  output  per  mine  had  de- 
creased in  absolute  amounts  each  year  rendered  the  allocation 
of  quotas  the  most  difficult  problem  of  syndicate  management. 
From  1900  to  1908,  the  average  output  per  establishment  de- 
creased 41.5  per  cent  in  quantity  and  47.8  per  cent  in  value.^ 

The  speculation  accompanying  the  revival  of  prosperity  in 
1905  found  a  favorable  field  in  potash  enterprises.  It  was  ac- 
centuated by  the  so-called  Gamp  law  passed  by  the  Prussian 
Diet  for  the  purpose  of  preventing  the  multiplication  of  new 
mining  enterprises.  It  was  provided  in  this  law  that  for  two 
years  from  its  enactment,  no  person  should  have  the  right  to 
explore  for,  locate,  or  secure  title  to  mining  rights  in  the  territory 
where  Prussian  mining  law  was  binding.  As  it  happened, 
Prussian  mining  law  did  not  apply,  in  respect  to  potash  salts,  to 
Hanover,  where  all  mining  rights  were  the  property  of  the  land- 
owner, not,  as  in  Prussia,  of  the  discoverer.  Consequently, 
while  the  lex  Gamp  effectually  checked  potash  exploration  in 
Prussia,  speculation  merely  shifted  its  base  of  operations  to 
Hanoverian  territory.  The  purchase  and  sale  of  mineral  rights, 
the  lease  of  lands,  and  development  on  the  royalty  plan  of  land 
bearing  potash,  or  supposed  to  bear  it,  furnished  great  oppor- 
tunities for  the  promoter,  and  the  basis  for  unprecedented  potash 
speculation,  and  a  flood  of  potash  securities  of  which  a  gullible 
pubUc  never  seemed  to  get  enough.  The  Gewerkschaft,  a  form 
of  association  in  favor  for  mining  enterprises,  was,  owing  to  a 


Total  Output 

Total  Value 

Average 

Average 

IN  Millions  of 

IN  Million 

No.    OF 

Output  Per 

Value  in 

Year 

DOPPELZENTNERS 

Marks 

Concerns 

Concern 

Marks 

1900 

304 

56.2 

15 

202,407 

3,748,688 

1901 

34-3 

59-1 

19 

180,604 

3,112,027 

1902 

32.9 

56.9 

24 

137,057 

2,370,379 

1903 

36.6 

64.1 

28 

130,865 

2,289,602 

1904 

43-0 

74.1 

28 

153,621 

2,645,634 

1905 

48.3 

81.6 

32 

151,021 

2,551,336 

1906 

54-8 

91.7 

36 

152.093 

2,546,777 

1907 

55-8 

93-4 

41 

136,092 

2,278,587 

1908 

59-2 

97.8 

50 

118,315 

1,956,264 

Dr.  Kreuzham,  in  Kartell-Rumlschau,  1911.     The  doppelzentner  contains  205  lbs. 


THE   GERMAN    POTASH    SYNDICATE  809 

peculiarity  in  Hanoverian  law,  impossible  to  organize  in  that 
state.  Nevertheless,  the  device  of  buying  up  the  charters  of 
small  or  defunct  Gewerkschaften  in  Prussia  and  other  states 
enabled  promoters  to  circumvent  the  law,  and  gave  rise  to  a 
flourishing  trade  in  charters.  Further,  the  lex  Gamp  did  not 
affect  mining  rights  already  granted.  Many  enterprises,  aban- 
doned after  the  activity  of  the  years  following  1898,  became 
once  more  objects  of  public  favor  and  speculation. 

It  is  impossible  here  to  describe  the  negotiations  connected 
with  the  admission  of  the  various  mines  to  the  syndicate.  But  the 
case  of  Sollstcdt,  though  not  typical,  is  of  special  interest  because 
of  the  part  played  by  it  in  the  international  complication  of 
later  years.  In  1905,  the  SoUstedt  mine,  owned  by  H.  Schmidt- 
mann,  began  producing,  and  made  its  entrance  into  the  syndicate 
conditional  upon  the  adoption  of  certain  reforms  in  the  policy 
of  the  syndicate,  among  other  things  urging  the  adoption  of  a 
lower  price  basis.  Although  the  opposition  claimed  that  these  re- 
form demands  were  merely  a  cloak  to  hide  the  real  demand  for  a 
large  quota,  one  cannot  deny  that  a  policy  of  lower  prices,  in  order 
to  remove  the  incentive  to  the  increase  in  the  number  of  mines, 
was  entitled  to  serious  consideration. 

Unable  to  secure  the  assent  of  the  syndicate  to  his  proposals, 
Schmidtmann  closed  contracts  late  in  1905  with  several  Ameri- 
can potash  buyers.  When  it  became  known  that  the  syndicate 
was  granting  larger  discounts  to  the  great  fertilizer  corporations, 
the  Independent  Fertilizer  Manufacturers  Association,  consisting 
of  some  sixty-five  companies,  was  formed  and  proceeded  to  con- 
tract with  Sollstedt  for  more  potash.  In  all,  the  contracts  called 
for  the  annual  delivery  of  about  50,000  tons  of  pure  potash  at 
prices  which,  though  not  specified,  were  guaranteed  to  be  as  low 
as  those  currently  paid  by  the  large  fertilizer  corporations.  Ac- 
cording to  the  prices  paid  for  potash,  American  buyers  might  now 
have  been  divided  into  several  groups  :  first,  the  two  large  fer- 
tilizer corporations,  receiving  discounts  of  eleven  and  thirteen  per 
cent;  next,  the  group  of  Sollstedt's  customers,  some  of  whom  were 
under  obligation  to  secure  their  potash  from  the  syndicate  up  to 
January  i,  1910  (deliveries  to  these  were  not  to  begin  until  1910); 
other  buyers,  bound  by  contract  to  take  their  total  potash  require- 


8io  TRUSTS,   POOLS   AND   CORPORATIONS 

ments  from  the  syndicate  at  discounts  of  five  and  seven  percent; 
and  buyers  under  no  obligations  and  paying  the  current  prices. 

Schmidtmann  was  much  criticized  for  his  action.  He  was 
accused  of  lack  of  patriotism,  of  wasting  a  great  natural  resource 
for  the  benefit  of  a  foreign  nation  instead  of  conserving  it  for  the 
welfare  of  the  German  people.  Since  geological  experts  estimate 
the  supply  of  potash  salts  to  be  sufficient  to  supply  the  world 
for  600,000  years,  the  ever-recurring  arguments  bearing  on  the 
subject  of  exhaustion  have  little  force.  The  true  explanation  of 
the  hostile  attitude  against  Schmidtmann  and  other  mine  owners 
who  made  low  price  sales  to  foreign  customers,  and  against 
foreigners  who  attempted  to  buy  potash  mines,  seems  to  be  the 
belief  that  the  possession  of  a  natural  monopoly  ought  to  enable 
the  nation  to  secure  monopoly  gains. 

At  the  close  of  1905,  Sollstedt  was  more  unhkely  than  ever  to 
enter  the  syndicate.  Toward  the  end  of  January,  1906,  there 
was  serious  talk  of  dissolving  the  combination."  In  the  course 
of  the  negotiations  the  syndicate  issued  an  ultimatum,  offering 
quotas  to  Sollstedt  and  two  other  "  outsiders,"  under  threat  that 
should  the  offer  not  be  accepted,  steps  to  effect  the  dissolution 
of  the  organization  would  immediately  be  taken.  Schmidtmann 
in  answer  to  this  declared  that  the  size  of  the  quota  was  a  minor 
matter,  and  that  he  was  mainly  concerned  with  the  reforms  in 
organization  and  in  the  price  policy.  No  definite  action  as  to 
dissolution  of  the  syndicate  followed.  Negotiations  were  con- 
tinued. The  general  meeting  of  the  syndicate  refused  Schmidt- 
mann's  proposal  to  lower  prices,  and  during  the  latter  part  of 
the  year,  the  Sollstedt  conflict,  as  it  came  to  be  known,  was 
allowed  to  lag.  The  situation,  critical  as  it  was,  was  aggravated 
by  the  syndicate's  difficulties  with  other  mines,  especially  with 
Deutsche  Kaliwerke,  which  also  presented  a  number  of  reforms 
as  the  condition  of  its  entrance.  The  crisis  became  so  acute 
that  a  number  of  mines  were  ready  to  give  notice  of  withdrawal 
from  the  combination  as  soon  as  any  mine  except  Sollstedt 
should  sell  a  single  doppelzentner  independently.  Despairing 
of  inducing  Sollstedt  to  enter,  it  was  proposed  to  make  use  of 
Sollstedt  and  Schmidtmann's  connection  with  the  mine  Aschers- 
leben  (a  member  of  the  syndicate)  to  bring  a  suit  for  damages. 


THE   GERMAN    POTASH    SYNDICATE  8i  i 

alleged  to  have  been  suffered  by  the  syndicate  throiTgh  the  con- 
nection of  the  syndicate  member,  Aschersleben,  with  the  out- 
sider, Sollstedt.  Schmidtmann,  in  his  capacity  as  chairman  of 
the  supervisory  board  of  Aschersleben,  had  carried  through 
several  transactions  connected  with  the  development  of  Soll- 
stedt, by  the  aid  of  Aschersleben  funds ;  the  shares  of  Sollstedt 
had  been  subsequently  purchased  by  Aschersleben.  It  is  un- 
necessary to  go  into  detail;  the  upshot  of  the  matter  was  that  a 
number  of  stockholders  of  Aschersleben  formed  a  protective 
association  and  attempted  to  oust  Schmidtmann.  However,  the 
affair  began  to  clear  up,  and  on  May  lo,  Sollstedt  agreed  to  enter 
the  syndicate,  the  reform  demands  being  postponed  for  later 
discussion  and  decision.  The  statement  made  later  in  connection 
with  the  potash  controversy,  that  pressure  of  public  opinion  and 
fear  of  government  intervention  caused  Sollstedt  finally  to  enter 
the  syndicate,  seems  to  be  only  partially  supported  by  fact. 
Government  intervention  had  been  advocated,  but  for  a  different 
purpose,  that  of  checking  the  increase  of  new  mines,  not  the 
regulation  of  thiose  already  in  existence. 

By  the  terms  of  settlement,  Sollstedt  continued  deliveries  of 
potash  to  its  American  customers,  paying  fines  for  the  excess 
over  its  allotment.  The  syndicate  was,  however,  granted  the 
option  after  January  i,  1908,  of  assuming  the  contracts  calling 
for  current  delivery,  while  the  new  syndicate,  should  one  be 
organized  in  1909,  was  to  have  the  option  of  assuming  all  the 
sixty-five  or  seventy  contracts.  The  syndicate  chose  to  make 
use  of  its  option  and,  upon  January  i,  1908,  assumed  the  Soll- 
stedt contracts  as  binding.  Delivery  proceeded  smoothly  for  a 
time,  but  in  June  came  an  unusual  influx  of  orders  from  the 
Sollstedt  customers,  and  a  corresponding  decrease  in  the  orders 
from  those  customers  of  the  syndicate  who  were  bound  by  con- 
tract to  secure  from  it  their  total  potash  requirements.  The 
officers  of  the  syndicate  concluded  immediately  that  the  Sollstedt 
customers  intended  to  resell  potash  to  purchasers  already  obli- 
gated to  the  syndicate,  —  a  conclusion  strengthened  by  com- 
plaints of  discrimination.  The  syndicate  did  not  propose  to 
allow  any  surplus  for  resale  and  accordingly  restricted  deliveries. 
Sollstedt's  American  customers  protested  against  this  violation 


8i2  TRUSTS,    POOLS   AND   CORPORATIONS 

of  contract  and  refused  to  acknowledge  the  transfer  of  the  con- 
tracts to  the  syndicate.  Sollstedt,  contrary  to  contract,  resumed 
independent  delivery  in  July,  pointing  out  that  the  alleged  in- 
tended breach  of  contract  on  the  part  of  the  syndicate's  custom- 
ers did  not  call  for  the  violation  of  another  agreement,  in  order 
to  punish  the  offenders.  Owing  to  the  fact  that  Sollstedt  had 
deposited  large  security  guaranteeing  delivery,  the  Americans 
could  exert  considerable  pressure.  The  syndicate  accepted  the 
situation  without  further  action  at  the  time. 

The  trouble  with  Sollstedt,  though  the  most  serious  encountered 
during  the  existence  of  the  fourth  syndicate,  by  no  means  stood 
alone.  The  mines  Rossleben  and  Ronnenburg  which  also 
applied  for  admission  to  the  syndicate  in  1905,  settled  the  quota 
problem  by  a  compromise  and  became  members  in  March,  1906. 
In  the  same  year  the  Kaliwerk  Friedrich  Franz  entered,  in  which 
the  government  of  Mecklenburg  was  chief  stockholder;  and  the 
Prussian  fisc,  in  order  to  strengthen  its  position  in  the  syndicate, 
bought  the  mine  Hercynia.  The  influence  of  the  group  of  newer 
mines  had  been  constantly  increasing,  and  at  the  general  assembly 
in  November,  1906,  they  were  able  to  elect  a  majority  of  the 
supervisory  council.  They  proceeded  to  make  use  of  their  power 
in  an  attempt  to  introduce  a  reorganization  of  the  syndicate's 
technical  and  mercantile  policy.  This  was  much  facilitated  by 
the  change  in  general  directors  in  February,  1907,  following  a 
long  dispute  and  a  series  of  complaints  of  favoritism  to  the 
older  mines.  But  the  completion  of  Sollstedt  and  the  Deutsche 
Kaliwerke,  which  threatened  the  very  existence  of  the  syndicate, 
directed  efforts  toward  inducing  these  to  enter  the  fold.  The 
agreement  with  Sollstedt  has  been  mentioned.  The  set  of  re- 
forms advocated  by  the  Deutsche  Kaliwerke  were  given  up,  as  in 
the  case  of  Sollstedt.  The  question  in  dispute  was  finally  limited 
to  one  of  quotas.  After  appraisal  by  a  special  commission  and 
several  conferences,  the  long  protracted  negotiations  came  to  a 
close.  The  syndicate  ratified  the  entrance  of  Sollstedt  and  Deut- 
sche Kaliwerke  on  June  19,  1907.  A  few  months  later,  in  Novem- 
ber, three  new  mines  were  added  to  the  syndicate  membership. 

The  year  1908  brought  no  halt  to  the  increase  in  the  facilities 
for  the  production  of  potash.     But  the   older  members  of  the 


THE   GERMAN    POTASH   SYNDICATE  813 

syndicate  were  surprised  when  they  heard  that  a  gfoup  of  capi- 
taHsts  representing  the  powerful  agrarian  association,  the  Bund 
der  Landwirte,  had  purchased  extensive  potash  properties  with 
the  intention  of  establishing  still  another  potash  mine.  In  view 
of  the  distinctly  friendly  attitude  which  the  syndicate  had 
always  shown  toward  the  agrarian  associations,  it  was  not  to  be 
expected  that  they  would  seriously  consider  competing  with  the 
syndicate.  The  syndicate  was  successful  during  the  year  in 
inducing  all  "outsiders  "to  become  members  of  the  organization. 
At  the  close  of  1908,  there  were  forty-nine  mines  in  operation, 
all  of  them  syndicate  members ;  sixty-five  companies  in  addition 
had  already  begun  borings  and  shafts. 

A  distinct  development  of  the  potash  industry  in  this  period 
was  the  organization  of  companies  to  buy  up  potash  lands  in 
order  to  prevent  the  establishment  of  more  mines.  Several  of 
the  newer  mines,  headed  by  the  Deutsche  Kaliwerke,  organized 
a  company  (Vereinigungsgesellschaft  fur  KaUbergbau)  to  buy  up 
potash  properties  with  the  express  purpose  of  demanding  in 
return  for  not  developing  them,  an  excess  quota  from  the 
syndicate,  so  that  reasonable  interest  on  the  investment  in  pot- 
ash properties  could  be  paid.  A  group  of  the  older  mines  also 
formed  a  similar  association,  the  Schutzbohrgmeinschaft.  Its 
offer  to  sell  the  fields  it  had  acquired  to  the  syndicate  was  rejected. 

The  continued  overdevelopment  of  facilities  for  potash  pro- 
duction was  due  to  a  complex  of  causes  rather  than  to  any  single 
factor.  Various  peculiarities  of  the  potash  industry  have  made 
it  a  favorite  for  investment  and  speculation.  The  participation 
of  the  government  in  the  industry  and  the  patriotic  desire  to 
invest  in  home  enterprises  doubtless  had  an  influence.  But 
Germany's  possession  of  a  natural  monopoly  and  the  unusual 
profitableness  of  the  industry  have  certainly  been  prime  factors. 
Dr.  Pinner  gives  interesting  figures.  In  1906,  which  he  con- 
siders a  normal  year,  the  average  profits  of  twenty-one  mines 
was  15.9  per  cent,  while  dividends  of  13.5  per  cent  were  de- 
clared. Within  two  years  the  average  dividends  were  decreased 
to  9.5  per  cent,  because  of  the  increase  in  the  number  of  mines 
and  the  decreased  average  output.  Upon  the  basis  of  expert 
opinion.  Dr.  Pinner  states  that  the  cost  of  production  of  potash 


8 14  TRUSTS,   POOLS  AND   CORPORATIONS 

salts  varied  from  40  to  60  per  cent  of  selling  prices.  With  the 
smaller  average  output  per  mine  in  1908,  the  proportion  was 
somewhat  higher,  but  still  low  as  compared  with  other  mining 
industries.  Potash  mine  owners  do  not  neglect  to  make  large 
deductions  for  amortization  and  depreciation. 

The  fact  that  the  capital  required  for  developing  a  potash 
mine  is  considerable  seems  to  have  had  little  effect  in  checking 
production.  The  capital  stock  of  each  of  the  twenty-one  mines 
mentioned  above  was,  with  one  exception,  in  excess  of  ^400,000; 
the  average  was  well  over  $1,000,000.  The  average  cost  of  a 
boring  ranges  from  $15,000  to  $25,000,  and  one  at  least  must  be 
made  preliminary  to  the  sinking  of  a  shaft.  The  risks  of  the 
potash  industry  were  insufficient  to  check  investment,  although 
they  are  of  a  pecuHar  nature,  especially  the  danger  of  water  dis- 
solving the  salts. 

In  addition  to  the  unusual  profitableness  of  the  industry,  one 
must  mention  among  the  inducements  to  speculation  the  attempts 
of  the  Prussian  government  to  regulate  the  industry.  Reference 
has  been  made  to  the  Gamp  law.  Prominent  among  the  argu- 
ments of  its  proponents  was  that  the  passage  of  such  a  measure 
was  the  only  means  of  preventing  potash  fields  from  being 
monopoHzed  by  private  individuals.  The  objection  to  the  law, 
that  a  large  number  of  boring  companies  would  be  destroyed, 
was  not  borne  out.  Instead,  the  law  greatly  increased  the  value 
of  their  holdings.  An  instance  is  reported  in  which  the  Inter- 
national Boring  Company,  at  Erkelenz,  working  with  a  capital 
of  1,000,000,  marks,  had  acquired  a  large  number  of  potash 
fields,  and  sold  them  several  months  after  the  enactment  of  the 
law  for  35,000,000  marks.  Though  the  lex  Gamp  was  super- 
seded July  8,  1907,  by  a  new  mining  law,  its  provisions  were  in 
essentials  continued. 

The  extension  of  the  police  requirement  that  every  mine  have 
at  least  two  passable  exits  was  also  instrumental  in  increasing 
the  number  of  mining  companies.  The  construction  of  a  second 
shaft  necessitated  for  many  mines  a  large  outlay  of  capital. 
Since  the  ordinance  could  be  complied  with  by  connecting  two 
adjoining  mines  underground,  this  method  was  adopted  by  some 
of  the  mines.      Other   mines  holding  extensive  tracts  of  land 


THE   GERMAN    POTASH   SYNDICATE  Si  5 

complied  with  the  law  by  constructing^  a  second  sTiaft,  but,  in 
addition,  organized  a  subsidiary  company  to  take  charge  of  it, 
and  the  new  company  proceeded  to  demand  an  independent 
quota  from  the  syndicate.  Among  the  members  of  the  syndicate 
which  adopted  the  latter  course  were  Burbach,  Westeregeln, 
Gliickauf-Sondershausen,  Aschersleben,  New-Stassfurt,  and 
Rossleben. 


V.    The  Renewal  Negotiations,   i 908-1 910 

Negotiations  concerning  the  renewal  of  the  syndicate  began 
nearly  a  year  and  a  half  before  final  decision  was  necessary,  — 
in  itself  striking  evidence  that  great  difficulty  was  expected. 
At  a  general  meeting  of  the  syndicate  on  January  14,  it  was  de- 
cided that  the  supervisory  council  should  submit  before  May  i 
the  draft  of  a  new  contract.  Pending  the  outcome  of  the  nego- 
tiations, the  council  succeeded  in  inducing  ten  mines  to  refrain 
from  "  outside  "  sales  till  June  30,  1909.  In  the  hope  of  strength- 
ening their  influence  in  the  syndicate,  a  number  of  the  mines 
began  to  divide  their  ownings,  intending  to  use  the  fields  con- 
trolled by  subsidiary  companies  as  defense  against  the  reduction 
in  quota  which  was  bound  to  come.  As  an  instance,  Gltickauf- 
Sonderhausen  announced  its  intention  of  transferring  its  reserve 
fields  to  six  subsidiary  Gewerkschaften.  The  supervisory  council 
proceeded  to  ask  each  mine  owner  to  hand  in  a  written  state- 
ment of  his  suggestions  for  reform.  In  the  replies,  the  evils  of 
the  existing  situation  were  evidently  recognized  by  all,  but  the 
proposed  remedies  revealed  much  divergence  of  opinion.  The 
propositions  of  a  group  of  Hanoverian  mines,  to  which  ten  or 
eleven  mines  expressed  complete  agreement,  give  some  light 
on  the  points  of  controversy.  They  advocated  the  creation  of 
a  second  council  (Beirat)  to  relieve  the  supervisory  council  of 
some  of  its  many  duties  under  the  old  organization.  The  dura- 
tion of  the  new  syndicate  should  be  ten  years.  The  admission 
of  new  members  was  to  be  left  to  an  arbitration  board.  Products 
were  to  be  sold  under  certified  analyses.  Transfer  of  quotas 
from  one  mine  to  another  (under  restrictions)  was  to  be  facili- 
tated.    All  these  propositions,  as  well  as  sundry   others,  were 


8i6  TRUSTS,   POOLS  AND   CORPORATIONS 

actively  opposed.  Transfer  of  quotas  was  especially  opposed 
by  the  fiscal  representatives  on  the  ground  that  it  would  further 
the  "  Vertrustung "  of  the  industry.  It  would  undoubtedly 
have  increased  consolidation,  and  the  government's  fear  of  hav- 
ing several  less  efficient  plants  shut  down,  and  a  number  of 
laborers  thrown  out  of  employment  thereby,  was  a  chief  factor 
in  determining  its  attitude.  Another  proposal  was  that  each 
mine  should  receive  an  additional  quota  for  each  undeveloped 
potash  field  in  its  possession.  The  adoption  of  such  a  measure 
would  have  greatly  altered  the  appearance  of  the  allotment  table. 
For  instance,  Gliickauf-Sondershausen,  owning  258  fields,  had  at 
the  time  a  smaller  quota  than  another  mine  with  only  four. 

During  the  spring  and  early  summer  of  1908,  the  committee 
of  the  supervisory  council  in  charge  of  the  renewal  negotiations 
worked  constantly  to  eliminate  as  much  of  the  friction  as  pos- 
sible. The  Prussian  government  had  early  expressed  its  opinion 
that  renewal  of  the  syndicate  was  by  all  means  to  be  desired ; 
doubt  as  to  the  attitude  of  the  fisc  was  no  longer  a  deterrent 
factor.  It  had  been  stated  frankly  that  should  the  fisc  decline 
to  become  a  member  of  a  new  combination,  the  chances  were 
overwhelmingly  against  its  formation.  The  expressed  wishes 
were,  as  far  as  possible,  embodied  in  the  draft  of  a  new  syndi- 
cate contract  which  was  submitted  to  the  supervisory  council 
at  Eisenach  on  July  2.  According  to  its  provisions,  the  power 
of  the  potash  syndicate  was  to  be  extended  from  the  sale  and 
purchase  of  potash  to  the  acquisition  of  property  and  other 
rights.  Potash  products  should  be  sold  according  to  analyses 
of  their  exact  chemical  content.  It  was  planned  to  create  a 
second  council  (Beirat)  to  assist  the  supervisory  council.  The 
seat  of  the  syndicate  was  to  be  changed  from  Stassfurt  to  Berlin, 
—  a  concession  to  the  younger  mine  owners,  who  believed  that 
there  the  connection  between  the  syndicate  and  Ministry  of 
Commerce  would  be  more  intimate,  and  that  the  syndicate  would 
be  in  closer  touch  with  the  great  agricultural  associations  having 
central  offices  in  BerHn.  Of  more  importance  was  the  proposed 
freedom  to  transfer  quotas  from  one  mine  to  another,  when 
owned  by  the  same  firm. 

The  renewal  negotiations  were    in  the   main  a  repetition  in 


THE   GERMAN   POTASH   SYNDICATE  817 

intensified  form  of  those  in  1903  and  1904.  As  bTf'ore,  a  new 
agreement  must  be  concluded  before  June  30  of  the  year  of 
expiration,  in  order  to  avoid  the  complication  of  outside  sales. 
The  hope  of  speedy  renewal  vanished  as  the  months  passed, 
and  the  entire  second  half  of  the  year  was  devoted  to  discussion 
of  the  plan  of  reorganization ;  the  chief  question,  that  of  allot- 
ments, was  shelved  until  an  agreement  on  otiicr  points  should 
be  reached.  Among  the  mass  of  articles  and  reports  which 
filled  the  press,  an  article  of  Dr.  Wachler,  the  chairman  of 
Salzdethfurth,  one  of  the  older  mines,  attracted  special  attention. 
Pointing  out  that  the  syndicate  was  not  in  a  position  to  avoid 
overproduction,  he  declared  that  the  regime  of  competition  was 
the  only  remedy.  The  elimination  of  all  the  less  capable  com- 
panies would  place  the  industry  once  more  on  a  firm  basis.  But 
the  opponents  of  Wachler's  view  claimed  that  the  excess  of 
mining  facilities  was  the  fault  of  legislation,  not  of  the  syndicate, 
and  that  price  cutting  would  deprive  Germany  of  all  advantage 
from  her  natural  monopoly.  They  also  stated  that  free  compe- 
tition would  cause  enormous  losses  to  a  great  number  of  security 
holders  interested  in  the  prosperity  of  the  industry. 

When  the  commission  of  the  syndicate  met  on  January  5, 
1909,  three  sub-committees  were  chosen,  one  to  deal  with  the 
hotly  contested  question  of  changing  the  domicile  of  the  syn- 
dicate, a  second  with  the  question  of  the  increased  utilization  of 
carnallite  (urged  by  the  carnallite  mines,  which  felt  that  their 
product  was  not  being  actively  pushed)  and  a  third  with  the 
question  of  the  size  and  transfer  of  allotments.  On  April  first, 
a  new  syndicate  plan  was  published,  which  left  the  question  of 
location  open,  but  proposed  changes  allowing  transfer  of  quotas 
between  the  groups  of  products  and  between  mines.  After  a 
discussion  by  the  full  commission,  and  restriction  of  the  right 
of  transfer  to  suit  the  Prussian  Minister  of  Commerce,  the  gen- 
eral assembly,  consisting  of  representatives  of  all  mines  belong- 
ing to  the  syndicate,  and  others  about  to  enter,  took  up  the  most 
difTicult  problem,  the  allocation  of  allotments.  It  was  strongly 
urged  that  the  old  allotment  table  be  taken  as  a  basis  and  that 
quotas  for  the  new  mines  be  provided  for  by  a  10  per  cent  hori- 
zontal deduction    from  the  quotas  of   the  older  mines,  the  re- 


8i8  TRUSTS,    POOLS   AND    CORPORATIONS 

quired  balance  to  be  assigned  pro  rata.  But  this  scheme,  as 
well  as  others  proposed,  failed  of  acceptance,  and  the  allotment 
question  was  again  referred  to  a  committee,  which  prepared 
accordingly  a  new  allotment  table,  but  with  as  little  chance  of 
acceptance  as  before. 

Since  there  was  little  doubt  that  lower  prices  would  follow 
the  dissolution  of  the  syndicate,  American  potash  buyers  could 
hardly  be  expected  to  favor  its  continuance.  All  the  pressure 
which  could  be  brought  to  bear  on  the  situation  was  exerted 
against  the  combination.  The  Virginia-Carolina  Company 
owned  702  of  the  1000  shares  of  Einigkeit,  controlling  there- 
fore that  mine.  Nothing  substantial  appears  to  have  come  out 
of  the  rumored  negotiation  between  the  mine  Teutonia  and  the 
American  Agricultural  Chemical  Company ;  the  rumor  caused 
a  flurry  of  excitement  and  the  publication  of  numerous  articles 
under  such  captions  as  "  Vaterlandische  oder  Amerikanische 
Bodenschatze.?"  with  repeated  patriotic  warnings  against  the  in- 
vasion of  foreign  capital.  This  had  the  material  result  some  time 
later  of  causing  such  transfers  of  mining  property  to  foreigners 
to  be  dependent  on  official  sanction.  That  American  influence 
was  exerted  against  the  syndicate  is  shown  more  distinctly  in 
the  transactions  concerning  Sollstedt  and  Aschersleben.  The 
chief  stockholder,  H.  Schmidtmann,  and  his  son,  W.  Schmidt- 
mann,  had  long  been  dissatisfied  with  syndicate  management. 
They  wanted  to  operate  at  full  capacity.  The  American  market 
was  a  favorite  because  of  its  great  capacity  to  absorb  potash, 
and  the  high  potash  content  of  the  wares  demanded.  Schmidt- 
mann had  already  secured  a  huge  slice  of  the  American  trade 
by  the  "  outside  "  sales  of  Sollstedt  in  1905-1906.  With  some  of 
the  American  independents  he  had  contracts  for  delivery  up  to 
191 7.  Consequently  he  was  not  at  all  averse  to  the  idea  of  com- 
bining the  independent  buyers.  Should  such  a  combination  be 
formed  he  would  contract  to  furnish  potash  at  low  prices.  This 
would  please  the  American  potash  buyers.  Schmidtmann  would 
have  long-time  contracts  for  deliveries  of  potash,  and  would  be 
intrenched  against  the  revulsion  which  might  follow  the  disso- 
lution of  the  syndicate ;  if  renewal  were  effected,  he  was  in  a 
position  to  force  the  syndicate  to  accede  to  his  demands.     How- 


THE   (lERMAN    POTASH    SYNDICATE  819 

ever,  the  attempt  of  W.  Schniidtmann  and  C.  F.  Meadows  of 
Baltimore  to  organize  the  Independent  Fertilizer  Company  in 
the  fall  of  1908  fell  through.  A  second  attempt  to  combine  the 
independent  fertilizer  manufacturers  in  the  U.  S.  Agricultural 
Corporation,  chartered  in  April,  1909,  also  bore  no  result.  The 
third  attempt  was  successful.  Between  midnight  June  30  and 
daylight  July  i,  presumably,  the  International  Agricultural  Cor- 
poration with  W.  Schmidtmann  as  president  and  C.  F.  Meadows 
as  treasurer  came  into  being,  having  obtained  possession  in  that 
same  short  space  of  time  of  the  Sollstedt  mine,  and  sold  potash 
which  it  had  bought  from  Sollstedt.  America  was,  and  is,  out- 
side of  Germany  itself,  the  syndicate's  biggest  customer.  Its  in- 
fluence, exerted  at  a  critical  period  in  the  life  of  the  combination, 
had  the  inevitable  effect  of  increasing  the  difficulties  of  renewal. 
In  spite  of  all  the  complications,  it  was  believed  that  the  .syn- 
dicate would  be  renewed  at  the  meetings  to  be  held  the  last  of 
June.  Prospects  brightened  during  that  month.  Many  of  the 
special  demands  were  withdrawn  and  differences  compromised. 
When  the  final  meeting  convened  at  Berlin,  potash  buyers  from 
many  countries  had  assembled  in  the  imperial  city  to  await  the 
outcome  of  the  negotiations,  the  American  delegation  being 
conspicuous.  Their  purpose  was  clear.  In  the  event  of  the 
dissolution  of  the  syndicate  a  price  war  would  be  the  prob- 
able result,  and  buyers  on  the  spot  would  be  able  to  secure 
cheap  potash.  The  meeting  on  June  29  was  devoted  to  the 
discussion  of  allotments.  Negotiations  were  resumed  on  the 
following  day.  By  ten  o'clock  that  evening,  thirty-five  mines 
had  signified  their  willingness  to  enter  on  the  terms  offered. 
At  eleven,  the  Prussian  fiscal  representative  announced  that 
unless  there  was  unanimous  agreement  by  midnight,  he  would 
proceed  to  make  independent  sales.  After  a  dramatic  session, 
the  obstinacy  of  one  mine  owner  defeated  the  efforts  at  renewal. 
The  remaining  representatives  (of  forty-one  mines)  agreed  infor- 
mally not  to  make  any  sales  independently  until  after  July  i.  On 
July  I,  it  was  learned  that  the  representatives  of  the  Westeregeln 
group,  the  Einigkeit,  and  the  Schmidtmann  mines,  Aschersleben 
and  Sollstedt,  had  made  large  independent  sales  of  potash  after 
leaving  the  hall  at   midnight.     This  added   complication   pre- 


820  TRUSTS,    POOLS   AND    CORPORATIONS 

eluded  the  possibility  of  organizing  a  new  syndicate  on  July  i. 
But  the  provisional  agreement  was  continued  to  July  8  and  then 
extended  to  July  24.  In  the  meantime  the  German  government 
had  threatened  to  levy  an  export  duty  on  potash,  and  the  West- 
eregeln  group  had  succeeded  in  annulling  its  "  outside  "  con- 
tracts. Upon  July  24,  a  new  syndicate  was  organized,  not 
including  SoUstedt,  Aschersleben  and  Einigkeit,  —  those  mines 
in  which  American  influence  was  strongest.  It  was  to  be 
located  at  Stassfurt,  and  its  continuance  was  contingent  upon 
the  satisfactory  adjustment  by  the  three  outsiders  before  Sep- 
tember 30,  of  their  independent  sales.  But  nothing  having  been 
accomplished,  a  "  Kampf-syndikat "  was  formed  without  them 
(on  September  30). 

Sollstedt,  through  the  International  Agricultural  Corporation, 
its  owner,  proceeded  to  sell  potash  to  all  the  independent  buyers 
with  whom  it  had  previously  contracted,  on  the  same  terms  as 
had  been  granted  to  the  American  Agricultural  Chemical  Com- 
pany. The  total  of  the  contracts  (including  those  of  Einigkeit 
and  Aschersleben)  involved  seven  or  eight  million  dollars  and 
called  for  about  120,000  tons  of  pure  potash,  or  four  fifths  of 
the  annual  American  importation.  The  contracts,  binding  for 
two  years,  were  provided  with  options  on  a  five-year  extension. 
The  unsuccessful  attempts  of  a  German  commission  sent  over  in 
August  to  induce  the  Americans  to  give  up  their  valuable  con- 
tracts, —  valuable  because  the  prices  quoted  were  about  30  per 
cent  lower  than  current  syndicate  prices.  The  fact  that  the 
syndicate  policy  of  making  the  export  trade  pay  the  largest  part 
of  the  profits  did  not  operate  as  nicely  when  two  fifths  of  the 
export  trade  was  taken  away,  the  arguments  concerning  the 
dissipation  of  a  national  resource,  the  strengthening  of  foreign 
nations  at  the  expense  of  the  Fatherland  and  the  Hke,  —  all 
these  increased  the  clamor  for  legislative  interference.  As  a 
result,  the  Prussian  government  submitted  in  December  a  pro- 
posed imperial  potash  law  to  the  Federal  Council  of  the  Empire. 
Though  the  idea  of  a  direct  export  tax  was  given  up,  the  bill 
proved  especially  displeasing  to  the  Hanoverian  faction  ;  and 
since  it  practically  nullified  American  contracts,  the  opposition 
which  developed  caused  its  withdrawal. 


THE   GERMAN    POTASH   SYNDICATE  821 

A  second  committee  of  the  syndicate,  vvhicii  came  over  to 
America  in  December,  was  as  unsuccessful  as  the  first.  About 
this  time  treaty  negotiations  in  connection  with  the  Payne- 
Aldrich  Tariff  were  in  progress.  Following  the  exchange  of  a 
number  of  informal  notes,  the  United  States  representing  that 
an  export  duty  would  be  considered  undue  discrimination  against 
American  trade,  the  State  Department  was  reported,  on  Janu- 
ary 17,  to  have  received  assurances  that  the  German  government 
would  not  press  its  scheme  of  levying  an  export  tax.  Germany 
was  soon  after  accorded  the  privilege  of  the  minimum  tariff. 

On  February  4,  the  draft  of  a  new  potash  law  was  brought 
before  the  Reichstag  by  the  Federal  Council.  After  a  lively 
debate  (February  14  and  15,  1910),  in  the  course  of  which  it 
became  clear  that  the  low-price  American  contracts  were  at 
least  the  occasion  of  the  bill,  it  was  referred  to  a  committee  of 
twenty-eight.  Much  altered,  it  came  back  to  the  Reichstag 
and  was  passed  on  May  25,  1910,  going  into  force  three  days 
later. 

The  potash  law,  thus  finally  enacted,  provides  for  imperial 
control  over  the  production  and  selling  prices  of  potash  salts 
until  December  31,  1925.  The  allocation  of  allotments  becomes 
the  duty  of  the  "konigliche  Vcrteilungsstelle,"  a  commission  of 
which  the  chairman  and  two  other  members  are  chosen  by  the 
Chancellor,  subject,  however,  to  ratification  by  the  Federal 
Council.  The  other  members  are  chosen  by  the  mine  owners. 
The  Verteilungsstelle  estimates  a  total  output  sufficient  to 
supply  the  world's  demand,  and  apportions  it  among  the  potash 
producers.  For  the  same  mine,  the  percentages  of  domestic 
and  export  output  must  be  the  same,  in  order  to  prevent  the 
possibility  of  any  mine  devoting  itself  exclusively  to  the  export 
trade.  For  the  current  year  a  scale  of  prices  which  should  serve 
as  the  maximum  for  domestic  and  as  a  minimum  for  export 
was  embodied  in  the  law.  Any  potash  mine  which  delivers  salts 
in  excess  of  its  legal  allotment  must  pay  into  the  imperial  treas- 
ury a  tax  of  from  ten  to  eighteen  marks  for  every  doppelzent- 
ner  in  excess  of  its  quota.  This  is  in  addition  to  the  regular 
(and  almost  nominal)  tax  of  sixty  pfennige  per  doppelzentner 
levied  upon  the  total  output  of  potash,  whose  proceeds  go  to 


822  TRUSTS,   POOLS  AND   CORPORATIONS 

pay  the  expense  of  administration  of  the  law,  any  excess  being 
used  for  propaganda  purposes.  The  Federal  Council  is  em- 
powered to  lower  the  surtax  in  the  case  of  contracts  executed 
before  December  17,  1909,  so  that  the  contract  prices  plus  sur- 
tax shall  not  exceed  the  prices  current  before  June  30,  1909. 
For  the  purpose  of  checking  the  increase  in  the  number  of  pro- 
ducers, the  law  provides  that  a  new  mine  shall  receive  an  allot- 
ment from  the  first,  but  one  smaller  than  its  capacity  would 
entitle  it  to  demand.  Not  until  the  third  year  shall  full  allot- 
ments be  granted.  Mines  with  two  shafts  shall  receive  a  10 
per  cent  addition  because  of  the  second  shaft.  Allotments  may 
be  transferred  between  groups  of  products  or  transferred  or 
exchanged  with  other  mines,  but  the  transfer  of  over  half  an 
allotment  requires  official  consent. 

As  an  example  of  social  legislation,  another  provision  re- 
quires attention.  It  is  provided  that  whenever  a  potash  mine 
reduces  wages  or  lengthens  the  time  of  employment,  its  quota 
is  to  be-  reduced  by  the  Verteilungsstelle,  on  the  ground  that 
such  action  vs,  prima  facie  evidence  that  capacity  has  decreased. 
In  the  decision,  the  Verteilungsstelle  must  call  in  two  labor  rep- 
resentatives to  act  as  part  of  the  court.  Employees  in  mines 
or  factories  which  close  because  of  transfers  of  allotments  are 
entitled  to  compensation  from  the  mine  owners,  up  to  the 
amount  of  twenty-six  weeks'  pay. 

The  law  provided  for  no  compulsory  syndicate.  But  under 
the  altered  conditions  which  it  brought  about  the  Kampf- 
syndikat  of  September  30,  1909,  was  dissolved,  and  a  new  one 
came  into  existence  on  June  7,  19 10. 

VI.    The  Potash  Controversy  between    Germany  and  the 

United  States 

The  potash  sold  to  Americans  by  the  Aschersleben,  Sollstedt, 
and  Einigkeit  mines  was  in  amount  far  in  excess  of  their  quotas 
under  the  new  law.  The  greater  part,  hence,  was  subject  to 
the  supertax,  which  nearly  equalled  the  selling  prices  of  the 
salts.  The  mines  Aschersleben  and  Sollstedt  refused  to  con- 
tinue  deliveries  unless  the  Americans  would    assume  the  tax. 


THE    GERMAN    POTASH    SYNDICATE  823 

The  American  holders  of  low  price  contracts  would  not  agree 
to  this,  since  assumption  would  mean  their  paying  higher  prices 
for  potash  than  those  who  bought  from  the  syndicate.  They 
denied  that  the  tax  was  a  charge  of  the  nature  implied  in  their 
contracts,  the  wording  of  which  was  "that  any  governmental 
duty  should  be  assumed  by  the  buyers."  They  maintained  it 
was  a  penalty  for  violation  of  a  German  law.  Expert  legal 
opinion  on  both  sides  of  the  Atlantic  split  on  the  question.  In 
Germany  the  majority  held  the  Americans  to  be  liable  for  pay- 
ment of  the  tax ;  in  America  the  opposite  opinion  prevailed. 
The  necessity  of  securing  potash  for  current  requirements 
forced  the  Americans  to  pay  the  tax,  which  they  did  under 
protest. 

Fertilizer  interests  in  this  country  denounced  the  law  as  a 
practical  repudiation  of  contracts  made  in  good  faith,  and 
appealed  to  the  State  Department  for  aid.  As  soon  as  the 
matter  could  be  taken  up,  in  the  fall  of  19 10,  it  became  evident 
that  the  Germans  did  not  wish  to  concede  any  more  ground 
than  was  absolutely  necessary.  The  Federal  Council  refused 
to  consider  a  reduction  of  the  supertax  in  the  case  of  the 
options,  according  to  which  the  buyers  had  demanded  a  five 
year  extension  of  contracts,  in  June,  1910.  A  commercial  rep- 
resentative of  the  State  Department,  accompanied  by  a  group 
of  fertilizer  manufacturers,  proceeded  to  Europe  in  September. 
He  declared  two  months  later  that  no  settlement  could  be  made  ; 
that  the  application  of  the  maximum  clause  of  the  tariff  act  of 
1909  was  in  order,  since  the  German  law  clearly  was  discrimina- 
tory against  America. 

The  controversy  reached  so  acute  a  stage  in  December  that 
President  Taft  submitted  the  whole  matter  to  the  Cabinet. 
Protests  of  fertilizer  manufacturers,  of  farmers  and  other  potash 
consumers  continued  to  arrive  at  the  State  Department.  Upon 
January  20,  191 1,  the  potash  syndicate  presented  a  statement 
for  the  consideration  of  the  President  and  the  Secretary  of 
State.  The  syndicate's  brief  seems  to  have  been  a  sober  and 
dignified  presentation  of  the  case  ;  though  the  inclusion  of  a 
number  of  misstatements  and  assertions  insufficiently  j^roved 
laid  it  open  to  attack.     But  it  seemed  that  the  crisis  had  passed. 


824  TRUSTS,    POOLS   AND   CORPORATIONS 

The  demand  of  our  State  Department  for  a  definite  statement 
from  the  German  government  elicited  a  reply  which  was  not 
made  public,  but  seems  to  have  led  to  the  adoption  by  our  gov- 
ernment of  the  attitude  which  the  German  had  maintained, 
namely,  that  the  affair  was  one  to  be  settled  by  the  parties  con- 
cerned, and  not  by  international  diplomacy.  After  a  series  of 
conferences  at  Hamburg,  an  agreement  between  the  Americans 
(except  the  International  Agricultural  Corporation)  and  the 
syndicate  was  reached.  Before  the  controversy  could  be  finally 
settled,  it  was  necessary  to  arrange  matters  with  the  Aschers- 
leben  and  Sollstedt  mines,  which  still  insisted  upon  delivering 
potash  subject  to  the  supertax.  But  negotiations  progressed  so 
rapidly  that  a  compromise  was  soon  agreed  upon. 

The  provisions  of  this  final  settlement  were  in  brief,  {a)  the 
withdrawal  of  all  suits  in  our  courts  involving  liability  for  the 
payment  of  the  potash  tax  levied  by  Germany;  (d)  the  assign- 
ment to  the  syndicate  of  the  American  contracts  with  independ- 
ent mines  ;  (c)  new  contracts  with  the  syndicate,  covering  full 
American  potash  requirements  for  five  and  one  half  years  on  a 
price  basis  practically  the  same  as  that  prevailing  before  the 
low  price  contracts  were  obtained  from  the  independent  mines ; 
and  (d)  the  reentry  of  the  independent  mines  Sollstedt  and 
Aschersleben  into  the  syndicate.  Aschersleben  bought  one  half 
of  the  Sollstedt  shares  from  the  International,  and  upon  January 
I,  191 1,  Sollstedt  entered  the  syndicate.  The  German  govern- 
ment agreed  to  refund  about  60  per  cent  of  the  supertax  held 
in  escrow  in  American  banks.  Aschersleben  received  1,050,000 
marks  from  the  American  Agricultural  Chemical  Company  and 
the  same  amount  from  the  International  in  return  for  its  consent 
to  annul  the  "  low  price  contracts." 

The  Einigkeit  mine,  one  of  those  which  made  independent 
sales,  was  not  much  involved  in  the  controversy.  The  low  price 
sales  to  the  Virginia-Carolina  Company  were  insufficient  to 
cover  requirements.  Forced  to  buy  the  balance  of  its  potash 
from  the  syndicate,  an  amicable  arrangement  was  made  in  19 10, 
whereby  Einigkeit  became  a  member  of  the  syndicate  Decem- 
ber 31  of  that  year,  paying  a  sum  of  about  $50,000  to  the  syndi- 
cate as  a  compensation  for  "  outside  "  deliveries  already  made. 


THE   GERMAN    POTASH   SYNDICATE  825 


VII.    The  Workincx  of  the  Potash  Law  of   1910 

The  potash  law  was  not  wholly  a  measure  concocted  on  the 
spur  of  the  moment  to  deprive  American  potash  buyers  of  the 
benefit  of  their  contracts.  It  is  beyond  question  true  that  this 
law,  though  in  its  terms  not  discriminatory  against  the  individu- 
als of  any  nation,  nevertheless  in  fact  discriminated  against 
American  purchasers,  and  was  designed  to  discriminate  against 
them.  By  its  wording  the  law  applied  to  all  German  potash 
mines  which  produced  amounts  beyond  a  certain  specified  allot- 
ment ;  hence  technically  it  would  not  appear  to  be  discriminatory. 
But  the  American  potash  purchasers  held  contracts  with  the 
only  mines  which  were  liable  for  the  supertax  imposed  by  the 
law  on  any  production  in  excess  of  the  specified  allotments. 
Moreover,  these  contracts  had  been  made  in  such  terms  as  to 
render  them  susceptible  of  a  construction  whereby  American 
purchasers  would  be  made  liable  for  the  payment  of  this  ex- 
tremely heavy  supertax.  In  other  words,  not  the  owners  of  the 
German  mines,  but  the  American  purchasers  from  them,  were 
the  persons  threatened  by  the  measure,  and  meant  to  be  threat- 
ened. Certain  it  is  that  the  result  of  this  combination  of  circum- 
stances was  decidedly  unfavorable  to  American  buyers,  and  to  all 
intents  and  purposes  amounted  to  discrimination  against  them.^ 

But  the  events  of  previous  years  had  paved  the  way  for  drastic 
control  of  the  industry.  The  German  government  had  played 
a  large  part  in  the  history  of  the  potash  industry  from  its  incep- 
tion;  there  had  been  agitation  in  1905  for  a  state  monopoly; 
previous  measures,  such  as  the  Gamp  law  of  1905  and  the  min- 
ing law  of  1907,  had  failed  to  bring  the  relief  desired  for  the 
industry  ;  this  bill  itself  had  been  under  discussion  from  Febru- 
ary until  May,  1910,  —  all  these  circumstances  indicate  that  the 
German  government  had  long  determined  to  keep  in  its  hands 
full  control  of  the  industry  and  of  the  prices  of  the  products. 

^  Whether  the  administration  of  President  Taft  would  have  been  justified  under 
these  circumstances  in  exercising  the  retaliatory  powers  given  by  the  tariff  act  of 
1909  is  a  question  of  political  expediency  upon  which  I  should  hesitate  to  give  an 
opinion,  as  involving  matters  which  lie  outside  the  economic  problems  with  which 
the  discussion  is  concerned. 


826  TRUSTS,   POOLS   AND   CORPORATIONS 

But  if  the  law  was  successful  in  preventing  low  price  potash 
sales,  it  was  in  other  respects  far  from  being  as  successful  as  its 
originators  predicted.  Instead  of  checking  the  continued  in- 
crease of  new  mines,  its  effect  was  similar  to  that  of  previous 
attempts  at  legislation,  in  furthering  the  evil  it  was  intended  to 
prevent.  As  soon  as  it  went  into  effect  a  new  wave  of  develop- 
ment began.  Not  only  were  vacant  fields  divided  and  subdi- 
vided to  form  bases  for  new  enterprises,  but  the  syndicate  mines 
also  proceeded  to  divide  their  properties  to  a  greater  extent  than 
before,  founding  new  subsidiary  companies  with  extra  quota 
demands.  Since  a  concern  was  legally  entitled  to  a  larger 
quota  if  two  or  more  shafts  were  operated,  and  since,  under  the 
law,  each  new  mine  was  guaranteed  a  quota,  it  became  neces- 
sary for  any  mine  which  did  not  wish  to  have  its  quota  reduced 
below  a  level  which  would  leave  a  profit,  to  establish  two  or  three 
subsidiary  companies.  Instances  are  numerous.  Aschersleben 
divided  its  possessions  to  form  four  new  enterprises.  Out  of 
the  original  properties  of  the  Gewerkschaft  Hugo  a  full  half 
dozen  mines  were  formed  by  division.  From  the  Gewerkschaft 
Amelie  eleven  new  undertakings  have  been  organized,  and  the 
list  might  be  continued.  With  the  honorable  exception  of 
Prussia,  governments  have  been  as  great  sinners  as  private  enter- 
prises in  the  promotion  of  new  mines.  Anhalt  has  four  and 
plans  two  more.  In  April,  191 1,  in  addition  to  the  sixty-nine 
syndicate  mines,  seventy-nine  were  in  process  of  construction, 
and  about  fifty  more  had  either  completed  or  were  making 
borings.  A  year  later,  ninety-seven  mines  were  prepared  to 
deliver  potash,  and  a  hundred  and  thirteen  were  in  process  of 
construction.  Dr.  Paxmann  stated  in  the  spring  of  191 3  that 
one  hundred  twenty-seven  mines  were  operating,  one  hundred 
thirty -two  in  construction.  The  failure  of  the  law  in  this  regard 
is  unmistakable. 

The  potash  law  had  another  effect  not  desired  by  its  pro- 
moters, that  of  furthering  concentration  within  the  industry. 
The  extension  of  the  movement  toward  concentration  which  had 
become  a  feature  of  coal  mining  and  banking,  was  much  delayed 
by  the  hostile  attitude  of  the  syndicate  of  1904,  —  an  attitude 
inspired    by    the    fiscal    representatives,    opposing    transfer   of 


THE   GERMAN    POTASH   SYNDICATE  827 

quotas.  Yet  the  opposition  of  the  syndicate  had  riot  been  suffi- 
cient to  keep  away  concentration  entirely.  The  fear  of  the 
loss  of  influence  shared  by  the  fiscal  mines,  should  the  private 
enterprises  be  free  to  combine,  added  little  to  the  deterrent  in- 
fluence. During  1905  certain  mines  secured  control  of  others 
by  means  of  stock  ownership.  Westeregeln,  backed  by  the 
Mitteldeutsche  Kreditbank,  acquired  three  fourths  of  the  shares 
of  the  new  mine  Rossleben.  The  .Schmidtmann  mine,  Aschens- 
leben,  purchased  the  shares  of  the  mine  Sollstcdt ;  and  other 
instances  might  be  given.  Yet  until  1909,  there  had  been  little 
immediate  advantage,  except  as  investment,  from  the  control  of 
one  mine  by  another.  Concentration  of  production  was  practi- 
cally prohibited,  despite  the  fact  that  mines  were  operated  at 
only  a  third  or  quarter  of  their  capacity. 

The  freedom  granted  by  the  potash  law  in  the  matter  of 
transferring  quotas  was  a  great  incentive  to  concentration. 
Mines  began  to  buy  up  quotas  or  controlHng  interests  in  other 
mines.  The  Wintershall  mine,  to  which  belonged  the  mines 
Heringen  and  Heiligenroda,  acquired  a  majority  of  the  shares 
of  Bismarckshall,  and  secured  control  over  five  other  mines. 
Later  it  was  reported  to  have  obtained  control  over  two  sub- 
sidiary companies  of  the  Gewerkschaft  Amelie.  The  fusion  of 
the  Deutsche  Kaliwerke  concern  and  the  Amehe  was  another 
notable  instance.  In  the  next  year,  191 2,  the  movement  con- 
tinued, the  cases  most  discussed  being  the  combinations  Einig- 
heit-Prinz  Adalbert,  and  Kurbach-Kriigershall.  In  nearly  every 
case,  the  combination  of  mines  was  accomplished  by  means  of 
stock  ownership.  The  purpose  was  usually  at  least  one  of 
three :  (a)  to  save  capital  outlay  in  the  construction  of  the 
second  shaft  required  by  the  police  ordinance ;  (^)  to  transfer 
or  exchange  quotas  so  as  to  concentrate  production  in  the  best 
situated  mine  ;  (c)  joint  ownership  and  administration  of  power 
plants  and  branch  railroads,  or  division  of  risk. 

Denunciations  of  the  potash  law  began  six  months  after  its 
passage  and  have  grown  in  number  and  vehemence.  The  opin- 
ion was  soon  freely  expressed  that  the  potash  law  was  a  failure; 
that  in  order  to  make  a  small  saving,  it  had  induced  speculation 
and  waste  of  millions.     The  government  finally  recognized  that 


828  TRUSTS,    POOLS   AND    CORPORATIONS 

the  law  had  not  been  operating  as  intended,  in  a  speech  of 
Minister  of  Commerce  Delbriick.  The  potash  industry  be- 
came the  object  of  a  two  days'  debate  in  which  a  lively  discus- 
sion as  to  the  employment  of  the  propaganda  money  was  a 
prominent  feature.  The  tax  of  sixty  pfennigs  had  yielded  a 
sum  much  larger  than  was  deemed  necessary  for  propaganda 
purposes.  Proposals  to  reduce  this  tax,  to  allow  the  excess  to 
go  into  the  imperial  treasury,  to  spend  the  money  more  freely, 
as  well  as  the  more  important  debate  on  the  general  ill-success 
of  the  law  brought  about  at  the  time  no  amendment.  Debate 
was  resumed  in  January  of  the  year  191 3,  and  finally  a  resolu- 
tion was  adopted  to  the  effect  that  any  reform  or  amendment  to 
the  potash  law  should  be  binding  for  all  mines  commenced  after 
January  15,  1913.  Hanoverian  conditions  presented  some  diffi- 
culty, but  it  was  generally  expected  that  an  amendment  or 
revision  of  the  imperial  potash  law  so  as  to  remedy  some  of  its 
weaknesses  would  soon  be  forthcoming. 

Among  the  definite  proposals  for  the  amendment  of  the  potash 
law,  urged  in  191 3,  was  one  presented  by  Dr.  Paxmann  in  a 
memorial  to  the  government  in  which  he  advocated  a  license  sys- 
tem according  to  which  a  government  concession,  to  be  granted 
only  when  the  demand  for  potash  warranted  it,  should  be  re- 
quired for  the  opening  up  of  a  new  mine.^  In  the  allotment  of 
quotas,  the  size  of  the  field  was  to  be  made  a  factor  in  order  to 
discourage  the  division  of  ownings  into  independent  enterprises. 
An  increase  in  the  length  of  the  period  during  which  the  new 
works  would  not  be  granted  full  quotas  was  also  proposed,  Hr. 
Emil  Sauer,  a  prominent  potash  miner,  disagreed  with  these 
proposals  and  demanded  the  prohibition,  until  1924,  of  new 
enterprises  not  already  in  process  of  construction.^ 

The  year  191 3  passed  without  the  publication  of  the  promised 
amending  bill  of  the  government,  but  finally  it  was  laid  before 
the  Bundesrat  in  February,  1914.^  The  bill  was  by  no  means 
acceptable  to  potash  interests  because  it  seemed  to  be  more  con- 
cerned with  the  fiscal  interests  of  the  government  than  with  the 

1  K.  R.,  1913,  pp.  199  et  seq.;  Berliner  Jahrbiicher,  1913,  p.  155. 

2  K.  R.,  1913,  p.  215;    Berliner  Jahrbiicher,  1913,  p.  156. 
^  Berliner  Jahrbiicher,  1913,  p.  156;   K.  R.  1914,  p.  195. 


THE   GERMAN    POTASH   SYNDICATE  829 

endeavor  to  remedy  the  industrial  situation.  The  chief  provisions 
of  the  amending  bill  were  ( i )  the  introduction  of  a  direct  tax  upon 
potash  at  a  rate  which  increased  with  the  amount  mined  ;  (2)  the 
abolition  of  the  existing  tax;  (3)  the  adoption  of  a  new  freight 
basis,  Muelhausen  ;  (4)  the  increase  to  ten  years  of  the  period 
during  which  incomplete,  provisional  quotas  were  assigned.^ 

Meanwhile,  the  idea  of  arresting  further  overdevelopment  of 
the  potash  industry  by  voluntary  agreement  among  the  members 
of  the  syndicate  had  been  gaining  ground.  The  matter  had 
been  discussed  during  the  year  191 3,  but  not  until  March  of  the 
following  year  was  it  brought  formally  before  the  organization.^ 
After  a  two-day  session  in  May,  139  of  the  169  members  of  the 
syndicate  signed  an  agreement  not  to  erect,  cause  to  be  erected, 
encourage,  or  lend  any  aid  to  the  erection  of  new  works  until 
after  December  31,  1919.^  Several  other  works  soon  fell  in  line 
so  that  within  a  month,  three  quarters  of  the  total  official  allotment 
was  represented  by  the  signers  of  the  contract.  The  plan  was 
then  formally  approved  by  the  Prussian  Minister  of  Commerce.* 

Whether  or  not  the  amending  bill  will  become  a  law  is  uncer- 
tain. The  political  crisis  which  has  supervened  has  undoubtedly 
rendered  the  potash  industry  incapable  of  bearing  the  burden 
of  the  proposed  tax,  and  has  rendered  immediate  action  less 
imperative.  The  voluntary  action  on  the  part  of  the  members 
of  the  syndicate  promises  to  prevent  the  rapid  aggravation  of 
the  potash  situation.^ 

VIII.    Conclusion 

In  its  influence  on  prices,  the  potash  syndicate  has  differed 
somewhat  from  other  Kartells.  Except  for  very  short  periods, 
export  prices  have  been  higher  than  domestic.  Having  a  mo- 
nopoly of  the  products,  there  has  been  no  necessity  for  a  resort  to 
the  "  dumping  "  which  has  been  a  practice  of  the  steel  and  coal 
Kartells.     This    has  always  proved    an  effective    pro-syndicate 

1  K.  R.,  1914,  pp.  195  et  seq. 

-  Ibid.,  1914,  pp.  300  et  seq. ;  Berliner  Jahrbiicher,  1913,  p.  157. 

3  K.  R.,  1914,  p.  489.  ■*  Ibid.^  1914.  p.  624. 

^  At  the  opening  of  the  European  War,  the  potash  syndicate  voted  an  appropria- 
tion of  100,000  marks  for  national  purposes,  and  placed  its  organization  and  press 
bureau  at  the  disposal  of  the  general  staff.     K.  R.,  1914,  p.  730. 


830  TRUSTS,  POOLS  AND    CORPORATIONS 

argument.  Prices  have  certainly  been  steadied.  Statistics  of 
prices  show  no  decline  in  the  price  of  muriate  of  potash  since  the 
formation  of  the  first  agreement  in  1879,  and  none  on  carnallite 
since  1888,  the  date  of  the  formation  of  the  first  syndicate. 

The  potash  syndicate  has  at  all  times  attempted  to  secure  the 
maximum  gain,  but  has  realized  that  the  demand  for  agricultural 
purposes  is  capable  of  great  expansion,  and  that  the  highest 
prices  may  not  be  the  most  profitable.  In  general,  potash 
prices,  though  not  to  be  classed  as  extortionate,  are  said  to  have 
been  higher  than  the  demand  for  the  product,  the  cost  of  pro- 
duction, or  the  interests  of  the  industry  itself  justify.  The  fact 
that  mines  running  at  much  lower  than  normal  capacity  could, 
in  1906,  pay  dividends  averaging  13.5  per  cent;  that  the  cost  of 
production  was  a  considerably  smaller  part  of  the  selling  price 
than  in  other  mining  industries  ;  the  fact  that  Schmidtmann  and 
others  could  contract  to  deliver  large  quantities  of  potash  at  30 
per  cent  below  prevailing  prices,  with  the  expectation  of  still 
securing  profit  therefrom,  —  all  these  indicate  a  range  of  prices 
above  the  competitive  level. 

The  syndicate  has  had  no  effect  in  decreasing  the  expenses 
of  production ;  its  influence  has  actually  been  exerted  in  the 
opposite  direction.  The  economies  which  have  been  effected  by 
syndicate  organization  have  been  in  distribution,  —  elimination 
of  the  wastes  of  competitive  selling  and  increase  in  the  effec- 
tiveness of  advertising.  But,  though  these  savings  have  been 
considerable,  the  syndicate  and  the  legislation  enacted  in  the 
attempt  to  check  tendencies  induced  by  syndicate  pohcies  have 
contributed  to  bring  into  existence  such  an  oversupply  of 
facilities  for  production  that  no  net  gain  in  efficiency  has 
resulted.  Since  the  demand  for  potash  is  only  sufficient  to  give 
existing  estabUshments  employment  much  below  normal  capacity, 
there  is  good  reason  to  believe  that  expenses  of  production  are 
higher  than  they  would  be  under  competitive  conditions,  and 
that  costs  as  well  as  prices  would  be  lower. 

Domestic  consumers,  as  noted,  above,  have  fared  somewhat 
better  than  the  foreign.  The  influence  of  the  government  mines 
has  always  been  exerted  in  the  direction  of  lower  prices  for  do- 
mestic consumers.     Most  favored  have  been  the  large  agricultural 


THE   GERMAN    POTASH   SYNDICATE 


831 


Year 

Price  of 

Carnallite  in 

Marks  per 

DOPPELZENTNER 

80  PER  Cent 
Muriate  of 

Potash 

Marks  per 

Doppelzentner 

Year 

Price  of 
Carnallite  in 

Marks  per 
Doppelzentner 

80  PER  Cent  - 
Muriate  of 

Potash 

Marks  per 

Doppelzentner 

1861 

1.60 

36.00 

1881 

1. 00 

12.70-16.00 

1862 

1.60 

30.00 

1882 

1. 00 

14.50 

1863 

0.80-1.60 

27.00 

1883 

1. 00 

13-50 

1864 

0.80 

24.00-19.50 

1884 

1. 12 

13.26 

1865 

0.80 

19.50-12.50 

1885 

1. 12 

i3-3(> 

1866 

0.80 

12.50-13.00 

i886 

1. 12 

13-32 

1867 

0.80 

12.50-13.00 

1887 

1. 12 

13-34 

1868 

0.80 

12.70-13.20 

1888 

0.80 

13-38 

1869 

0.80 

13.00-14.50 

1889 

0.80 

'3-43 

1870 

0.80 

13.80-18.50 

1890 

0.80 

13-45 

1871 

1. 10 

18.16-18.50 

1891 

0.80 

13-45 

1872 

0.80-1.20 

18.70-16.20 

1892 

0.90 

13.88 

1873 

0.80 

16.00-12.00 

1893 

0.90 

13-88 

1874 

0.80 

13.00-12.50 

1894 

0.90 

13.88 

1875 

0.80 

12.50 

1895 

0.90 

13.88 

1876 

o.So 

12.00 

1896 

0.90 

14.25 

1877 

0.80 

11.00 

1897 

0.90 

14.25 

1878 

0.80 

9.20 

I 889- I 908 

0.90 

14.70 

1879 

0.80 

11.00 

1880 

1. 00 

II. 15 

The  figures  given  in  Stange  (p.  95),  Engelke  (p.  38),  and  Schulze  (p.  59)  vary 
slightly  from  those  given  above. 

associations,  —  in  part,  it  is  alleged,  because  of  their  political 
influence.  The  favoritism  shown  to  these  societies  has  led  to 
many  complaints  from  potash  dealers.  The  syndicate  finally 
made  some  concessions  to  the  dealers  in  1905,  but  did  not  place 
them  in  every  particular  on  a  footing'  with  the  agrarian  associa- 
tions. After  1909,  when  the  restrictions  on  combination  among 
dealers  were  removed,  a  large  number  of  dealers'  organizations 
sprang  up  to  take  advantage  of  the  rebates  given  for  purchase 
in  large  quantities.  But  the  agricultural  associations  are  still 
favored.  The  attitude  of  dealers  has  generally  been  unfriendly 
to  the  syndicate. 

One  must  not  neglect  to  give  the  potash  combination  credit 
for  what  it  has  accomplished  in  connection  with  its  propaganda 
work.  By  the  distribution  of  publications,  exhibits  at  important 
agricultural    shows,    fertilizer    experiment    stations,    and    other 


832  TRUSTS,    POOLS   AND    CORPORATIONS 

methods,  it  has  conducted  a  general  educational  campaign  on 
the  use  of  fertilizer,  potash  especially.  The  efforts  of  the  syndi- 
cate to  keep  up  the  standard  of  the  products  and  to  insure 
prompt  deliveries  are  also  commendable. 

The  membership  of  the  Prussian  government  has  given  the 
potash  syndicate  a  character  distinct  from  other  Kartells.  Far 
from  being  a  passive  member,  the  government  has  always  exerted 
a  large  influence  upon  syndicate  policy.  More  than  once  it  has 
directed  its  energy  toward  keeping  the  organization  intact  in  the 
numerous  crises  through  which  it  has  passed.  In  the  negotiations 
of  1879,  1888,  1898,  and  1901,  the  fisc  took  an  active  pro-syndicate 
part;  when  renewal  came  up  in  1903,  the  Prussian  fisc  took  the 
initiative;  in  1908,  the  government  early  directed  its  influence 
toward  renewal.  It  cannot  be  seriously  doubted  that,  had  not 
the  Prussian  government  played  the  part  it  did,  the  syndicate 
would  early  have  gone  to  pieces. 

The  opinion  so  often  expressed  during  the  progress  of  syndicate 
negotiations  that  in  the  continuance  of  the  syndicate  lay  the 
only  means  to  avoid  the  ruin  of  a  number  of  enterprises  and 
losses  to  thousands  of  investors,  was  undoubtedly  correct.^  But 
one  may  doubt  whether  or  not  it  was  wise  to  enter  into  combina- 
tion to  preserve  the  profitableness  of  all  the  undertakings,  when 
the  policy  of  procrastination,  as  one  might  term  it,  caused  and 
will  continue  to  cause  much  greater  losses.  Free  competition 
during  the  eighties  would  have  been  attended  with  losses  smaller 
than  in  the  decade  1900  to  1 910,  or  none  at  all.  The  dependence 
of  the  value  of  potash  enterprises  upon  the  existence  of  the 
syndicate  is  clearly  shown  in  the  course  of  the  market  for  potash 
securities  during  the  past  decade.  It  is  reasonable  to  suppose 
that  under  the  rule  of  competition  the  enormous  over-investment 
of  capital  in  potash  enterprises  would  largely  have  been  avoided. 
When  all  is  said  for  and  against  the  syndicate,  one  may  doubt 
whether  the  potash  industry  is,  as  a  whole,  in  191 3,  in  a  more 
flourishing  financial  condition  as  a  result  of  the  existence  of 
combination.  H    R.  Tosdal 

Massachusetts  Institute  of  Technology 

^  It  is  said  that  bankers  would  extend  credit  only  to  those  mines  whose  intention  to 
enter  the  syndicate  was  known.     K.  R.,  vol.  v.,  p.  307. 


XXIV 

THE   GERMAN    STEEL   SYNDICATEi 

A  more  elaborate  account  of  the  Stahlwerksvcrband,  brought  clown  to  date, 
moreover,  is  now  in  process,  under  the  hands  of  Professor  H.  R.  Tosdal  of 
the  Massachusetts  Institute  of  Technology,  author  of  the  preceding  chapter  on 
the  potash  cartell.  It  will  form  part  of  a  comprehensive  treatise  on  the  Ger- 
man industrial  syndicates,  to  be  separately  published  in  due  time.  To  Dr. 
Tosdal,  I  am  indebted  for  the  following  comment  on  this  chapter  which 
serves  to  bring  it  up  to  date. 

The  Stahlwerksvcrband  was  renewed  in  1907  for  a  five-year  period.  The  chief 
difficulties  settled  temporarily  at  that  time  were  the  change  in  organization,  by  elim- 
inating the  Beirat,  the  adjustment  of  the  relations  between  the  individual  steel  works 
and  affiliated  wholesale  iron  dealers,  the  rearrangement  of  freight  bases,  and  the  allo- 
cation of  quotas.  The  last  became  increasingly  difficult  because  the  first  results  of  a 
new  tendency,  that  toward  overexpansion  of  productive  facilities  [illustrated  as  well 
in  the  potash  syndicate,  just  described]  began  to  find  expression.  The  force  and 
effect  of  this  tendency  to  increase  productive  capacity  beyond  demand  was  such  that 
when  renewal  in  191 2  came  up  for  discussion,  it  was  found  impossible  to  secure  the 
assent  of  producers  to  limitation  of  production  in  more  than  one  category  of  products, 
—  the  so-called  A  products.  All  provisions  relative  to  B  products  were  dropped. 
The  steel  syndicate  was  thereby  made  less  comprehensive  and  powerful  than  it  was 
when  it  commenced  operations. 

Walker,  I  believe,  regards  the  Stahlwerksvcrband  as  a  "  good  "  combination.  If 
one  is  to  form  an  opinion  from  the  character  of  its  price  policy,  the  judgment  of  the 
student  in  1914  would  be  the  same.  But  since  Walker  wrote,  there  has  taken  place 
the  new  development  mentioned  above.  In  so  far  as  the  over-rapid  expansion  of  steel 
enterprises  has  been  due  to  the  steel  syndicate, —  and  that  syndicate  influence  has 
been  great  is  undeniable,  —  the  statement  that  it  is  a  "good"  combination  must 
necessarily  be  modified.  The  extent  to  which  over-investment  and  consequent  waste 
has  been  induced  seems  to  me  to  have  been  so  great  as  to  neutralize  the  negative 
"goodness"  of  its  true  policy. 

Walker  seems  to  expect  the  further  expansion  of  the  syndicate.  As  events  showed^ 
syndicate  friends  were  gratified  to  be  able  to  secure  renewal  in  its  old  form  against 
the  opposition  of  1907.  In  1912,  they  did  not  succeed  in  doing  this.  The  under- 
lying cause  for  this  failure  was  the   fundamental  opposition  of  interests  of  the  two 

1  From  Qiiaj-ierly  Journal  of  Economics,  XX,  1906,  pp.  353-398.  The  copious 
scholarly  footnotes  are  for  the  most  part  omitted. 

833 


834  TRUSTS,   POOLS  AND   CORPORATIONS 

classes  of  concerns  which  must  be  induced  to  enter  a  combination  in  order  to  com- 
plete a  monopoly.  These  were  the  integrated  and  non-integrated  works  to  which 
Walker  refers. 

The  student  will  find  comparisons  most  enlightening  between  the  conditions 
which  in  Germany  brought  about  this  combination,  and  those  heretofore 
described  in  our  Chapter  V,  which  almost  contemporaneously  superinduced 
the  promotion  of  the  United  States  Steel  Corporation.  Taussig,  Some  Aspects 
of  the  Tariff  Question,  1915,  part  III,  on  iron  and  steel  should  also  be  read  in 
this  connection.  —  Ed. 

COAL  and  iron  are  the  foundations  upon  which  national  indus- 
trial greatness  is  based.  Germany  is  preeminent  in  both, 
and  in  both  of  them  there  are  powerful  combinations.  In  the 
coal  industry  Germany  takes  the  third  rank  among  the  nations 
of  the  world,  but  in  iron  and  steel  she  is  second  only  to  the 
United  States.  In  1904  the  pig  iron  production  of  the  four 
leading  countries  of  the  world  was  approximately  as  follows  : 
the  United  States  16,781,000,  Germany  (including  Luxemburg) 
10,119,000,  Great  Britain  8,500,000,  and  France  3,000,000  tons. 
In  steel  production  Germany  has  an  even  greater  lead  over 
Great  Britain.  The  present  position  of  Germany  is  the  result 
of  recent  developments,  which,  though  rapid,  have  been  very 
steady. 

The  two  primary  natural  conditions  for  the  iron  industry  are 
ore  supply  and  fuel.  In  both  of  these  respects  Germany  is 
richly  endowed.  In  regard  to  iron  ore  production  Germany  is 
only  surpassed  by  the  United  States  :  in  1904  the  total  output 
of  iron  ore  was  22,047,393  tons.  The  coal  output  in  1905  (ex- 
cluding lignite)  was  121,190,249  tons.  For  iron  ore  production 
by  far  the  most  important  district  is  the  "  Minette,"  which  lies 
in  Lorraine  and  Luxemburg,  and  extends  over  their  borders 
into  France  and  Belgium.  The  next  most  important  region  is  on 
the  right  bank  of  the  Rhine  in  the  valleys  of  the  Sieg,  the 
Lahn,  and  the  Dill.  The  production  of  ore  in  the  other  regions 
is  comparatively  small,  the  two  most  noteworthy  regions  being 
one  in  the  province  of  Hannover  and  the  Duchy  of  Brunswick 
and  another  in  Upper  Silesia.  There  are  three  great  coal  re- 
gions in  Germany.  The  greatest  is  that  of  the  Dortmund  or 
Ruhr  district,  which  produces  more  than  half  of  the  total.     The 


THE   GERMAN   STEEL   SYNDICATE  835 

next  in  importance  is  Upper  Silesia,  while  the  Saar  is  third. 
The  coal  deposits  of  Lorraine,  which  are  nearest  to  the  great 
ore  deposits  of  the  Minctte,  are  not  yet  developed.  The  near- 
est district  of  fuel  supply  is  the  Saar,  but  the  coal  of  that  region 
is  not  well  adapted  to  the  reduction  of  ores.  The  Minette, 
therefore,  must  be  reduced  by  the  Ruhr  coal,  and  an  exchange 
is  made  between  the  two  regions,  the  pig  iron  industry  being 
about  equally  divided  between  them.  The  Ruhr  also  uses  a 
good  deal  of  ore  from  the  Sieg,  Lahn,  and  Dill  districts,  as  well 
as  a  large  amount  of  foreign  ore.  In  Upper  Silesia  the  iron 
ore  and  coal  are  found  in  close  proximity,  but  the  supplies  of 
the  former  are  too  scanty  for  the  industry  of  that  region,  and  a 
large  proportion  has  to  be  imported,  especially  from  Austria 
and  Hungary.  The  Ruhr  coal  district  is  not  only  first  in  the 
magnitude  of  its  coal  output,  but  also  in  the  quality  of  the  coal, 
which  is  especially  adapted  to  the  production  of  coke.  In  this 
respect  neither  Silesia  nor  the  Saar  can  compare  with  it.  Al- 
though the  enormous  iron  ore  production  of  the  Minette  is  of  a 
low  grade,  its  cheapness  makes  up  for  the  deficiency  in  iron. 
The  Minette  ore  is  a  brown  hematite  with  from  35  to  40  per 
cent  of  iron  and  from  0.04  to  1.96  per  cent  of  phosphorus. 
The  ore  deposits  are  of  great  depth,  and  sometimes  as  much  as 
fifty  metres  thick.  On  account  of  its  high  percentage  of  phos- 
phorus this  ore  was  not  much  valued  until  the  discovery  of  the 
Thomas  process  (basic  converter).  The  ore  of  Siegerland,  red 
hematite,  contains  considerable  manganese,  and  is  of  a  high 
quality. 

Although  Germany  is  a  large  producer  of  iron  ore,  she  is  also 
a  large  importer  and  exporter.  In  1904  Germany  imported 
6,061,127  tons  of  iron  ore  and  exported  3,440,846  tons.  Large 
quantities  are  imported  for  mixing  with  domestic  ores.  In  the 
Rhenish-Westphalian  district  iron  ore  is  used  from  over  one 
hundred  different  places,  including  almost  all  known  sorts,  and 
coming  from  almost  all  parts  of  the  world.  The  usual  mixture 
in  this  region  is  Minette,  35-40  per  cent;  Swedish,  35-40  per 
cent;  red  hematite,  10  per  cent;  and  other,  10  per  cent.  In 
Silesia  a  typical  mixture  is  said  to  be  27  per  cent  of  the  local  ore 
with  21  per  cent  of  cinder,  23  per  cent  of  Swedish,  and  25  per 


836 


TRUSTS,    POOLS   AND   CORPORATIONS 


cent  of  Hungarian  ore.  Another  reason  for  the  large  iron  ore 
imports  is  that  there  are  many  iron  furnaces  far  from  the  domes- 
tic regions  of  supply,  so  that  the  foreign  ore  can  often  be  de- 
livered more  cheaply. 

The  distribution  of  the  pig  iron  production  of  Germany  and 
Luxemburg  is  shown  in  the  following  table :  — 

PRODUCTION  OF  PIG    IRON   IN   GERMANY  (INCLUDING 
LUXEMBURG)    IN    1905 1 


^5l 

i  h 

g 

Kind 

< 

< 
P. 

2  si 

ii 

S  d  t]  0 

3  fc  m 

•i 

s^ 

Ven 

« 

s^ 

< 

3  g  g  w 

w  £  a 
ooQK 

00 

0 

t2S 

^HS 

< 

2^ 

^ 

Foundry    .     .     . 

891 

177 

94 

15s 

54 

28 

83 

423 

1,906 

Acid  Bessemer    . 

263 

38 

48 

— 

77 

— 

— 

— 

42s 

Steel      iron      and 

other 

Spiegeleisen     . 

330 

283 

98 

I 

—      2 

— 

— 

714 

Thomas  or  basic  Bessemer 

2,868 

02 

259 

— 

240  133 

731 

2,884 

7,115 

Forge  or  mill  iron 

.     .     . 

25 

213 

362 

— 

—     14 

— 

213 

827 

Total 

4,377 

711 

861 

156 

371 1 177 

814 

3,521 

10,988 

Looking  first  at  the  production  of  the  different  districts,  it 
will  be  observed  that  Rhineland-Westphalia  (or  the  Ruhr)  has 
the  largest  production  in  1905,  and  that  Lorraine-Luxemburg 
(which  includes  a  large  part  of  the  Minette  district)  is  second. 
Together  they  produce  over  70  per  cent  of  the  total.  Silesia 
and  the  Saar  produce  only  about  8  per  cent  and  7  per  cent  re- 
spectively. If  the  table  be  examined  with  regard  to  the  kind  of 
iron  produced,  it  will  be  observed  that  most  of  the  iron  is  of 
Thomas  or  basic  Bessemer  steel, — in  1905  over  60  per  cent, 
while  foundry  iron  came  second  with  about  17  per  cent,  and 
mill  iron  or  puddled  iron  third  with  about  8  per  cent.  Acid 
Bessemer  steel  is  almost  negligible  to-day  in  Germany.  The 
bulk  of  the  Thomas  steel  is  produced  in  the  German  Minette 
or  in  the  Ruhr,  but  a  not  inconsiderable  amount  is  also  produced 


^  In  thousands  of  tons  :  thus  891  =  891,000  tons. 


"^  3  tons  only. 


THE   GERMAN   STEEL  SYNDICATE  837 

in  the  Saar.  Most  of  the  foundry  iron  is  produced  in  the  Ruhr 
and  the  Minette,  particularly  in  the  former.  Silesia,  which  oc- 
cupies a  very  subordinate  position  in  other  respects,  is  the  chief 
producer  of  mill  iron.  The  two  leading  facts  are,  however,  the 
great  preponderance  of  the  Minette  and  the  Ruhr  in  the  German 
iron  industry  and  the  predominance  of  Thomas  or  basic  Besse- 
mer steel. 

The  German  steel  industry  is  quite  as  important  in  the  pro- 
duction of  finished  products  as  in  the  raw  material.  The  distri- 
bution of  the  manufacturing  industry  does  not  correspond  very 
closely  with  the  distribution  of  the  blast  furnaces.  Bavaria,  for 
example,  has  a  large  machine  industry,  but  only  a  trifling  out- 
put of  pig  iron.  The  Minette,  though  it  rivals  the  Ruhr  in  the 
output  of  pig  iron,  cannot  compare  with  it  in  the  output  of 
finished  products.  It  is  only  recently  that  the  Minette  has  be- 
gun to  develop  the  manufacture  of  rolled  products  on  a  large 
scale.  Only  about  one  third  of  the  pig  iron  produced  in  the 
Lahn  and  Dill  valleys  is  worked  up  there.  In  Silesia,  however, 
there  is  an  extensive  output  of  rolled  products. 

Between  the  various  producing  regions  there  is  naturally  a 
lively  competition  for  the  German  market.  Especially  for  pig 
iron  there  tend  to  be  developed  certain  natural  regions  of  supply 
determined,  in  part,  by  the  costs  of  transportation.  This  is 
distinctly  the  case  as  between  Silesia  and  the  western  industrial 
regions.  Silesia  controls  the  supply  in  the  far  eastern  provinces, 
where  it  meets  western  competition  only  in  finished  products. 
Customs  duties  prevent  it  from  developing  its  sales  to  any  great 
extent  into  Austria  and  Russia.  For  the  two  great  western  pro- 
ducing regions,  the  Ruhr  and  the  Minette,  there  does  not  appear 
to  be  any  distinct  recognized  division  of  markets,  although  the 
latter  region  is  naturally  more  directed  to  the  export  trade. 

Germany  is  a  great  consumer  as  well  as  a  great  producer 
of  iron  products,  and  the  consumption  has  increased  rapidly 
with  the  great  development  in  production,  population,  and 
wealth.  In  1903  the  total  consumption  was  greater  than  in 
England,  although  it  was  much  below  that  of  the  United  States. 
Reckoned,  however,  according  to  population,  the  consumption 
of  England  was  greater  than  that  of  Germany.     The  total  con- 


838  TRUSTS,    POOLS   AND   CORPORATIONS 

sumption  depends  not  only  on  the  production,  but  also  on  the 
movement  of  imports  and  exports.  Germany  is  both  an  importer 
and  exporter  of  iron  products.  The  movement  for  1904  is 
shown  in  the  following  table : 

Imports  Exports 

Pig  iron  and  half  products 240,233  tons         701,985  tons 

Iron  manufactures 101,492  tons        2,022,01  tons 

The  chief  imports  were  pig  iron,  scrap  iron,  steel  bars,  iron 
for  plowshares,  and  tin  plate.  The  chief  exports  were  pig 
iron,  half  products,  beams  and  girders,  rails,  steel  bars,  sheet 
bars  and  sheets,  rods,  coarse  iron  wares,  etc.  The  principal 
foreign  markets  for  German  half  products  in  1904  were  England 
and  Belgium.  More  than  half  of  the  total  was  destined  to 
England.  The  exports  of  rails  from  Germany,  on  the  other 
hand,  were  widely  distributed,  though  England  again  was  the 
chief  market.  England  was  also  the  chief  purchaser  for  beams 
and  girders.  In  regard  to  the  official  export  statistics  a  great 
difficulty  always  exists  on  account  of  the  fact  that  the  given 
country  of  destination  is  not  the  country  of  final  destination  or 
consumption.  The  exports  to  Holland  and  Belgium  are,  in 
large  part,  really  destined  for  England. 

Although  the  German  iron  industry  is  extremely  formidable 
in  international  competition,  it  undoubtedly  finds  a  good  deal  of 
its  strength  in  the  existence  of  an  effective  protective  tariff, 
which  secures  the  home  market  and  enables  it  to  dump  its  sur- 
plus products  in  the  world  markets.^  The  protection  established 
for  the  iron  trade  has  a  vital  relation  to  the  existence  of  the 
various  iron  and  steel  combinations.  Before  the  present  pro- 
tective policy  for  the  iron  trade  was  inaugurated,  the  production 
lagged  far  behind  the  consumption.  In  1878  a  special  com- 
mittee of  inquiry  was  appointed  to  investigate  the  subject,  which 
almost  unanimously  agreed  that  protection  for  the  iron  industry 
was  necessary,  and  this  conclusion  was  followed  by  a  law  (1879) 
which  imposed  duties  higher  than  those  recommended,  which 
remained  in  effect  without  substantial  change  down  to  the  re- 
cent recasting  of  the  tariff  (to  go  into  effect  March   i,  1906). 

^  Cf.  F.  W.  Taussig,  Some  Aspects  of  the  Tariff  Question,  191 5,  pp.  11 7-2 16, 
especially  pp.  191  ff.  —  Ed. 


THE    GERMAN    STEEL   SYNDICATE  839 

The  duties  on  an  ad  valorem  basis,  both  in  the  old  and  in  the 
new  schedules,  amount  to  about  15  per  cent  on  pig  iron,  20  per 
cent  on  rails,  16  per  cent  on  sheets,  and  9  per  cent  on  rods. 

There  are  a  number  of  large  iron  and  steel  concerns  in 
Germany  which  combine  with  the  manufacture  of  steel  the  pro- 
duction of  the  raw  materials,  iron,  ore,  coal,  coke.  But  the  in- 
dividual concern  has  ceased  to  be  the  unit  in  German  industry 
to  a  large  extent.  The  modern  unit  is  the  cartell.  The  most 
important  matters  of  commercial  and  economic  policy  are  de- 
termined to-day  by  these  combinations. 

Combinations  in  the  German  iron  industry  are  of  ancient 
date,  and  have  assumed  forms  adapted  to  the  contemporary 
economic  organization.  The  distinction  between  the  early 
methods  of  combination  and  the  modern  system  lies  not  only  in 
the  more  comprehensive  character  of  the  latter,  but  also  in  the 
fact  that  the  modern  iron  industry  is  estabUshed  on  a  stupendous 
scale,  and  operates  for  the  world  market.  It  is  often  stated  that 
the  first  German  cartell  was  the  tin  plate  combination,  which 
was  formed  in  1862  ;  but  this  was  not  the  first  cartell  even  in 
the  iron  trade.  Rail  pools  existed  over  fifty  years  ago.  It  was 
not  until  the  seventies,  however,  that  they  acquired  much  im- 
portance. There  was  an  overdevelopment  of  the  iron  industry 
at  the  beginning  of  that  decade,  and  during  the  following  de- 
pression the  producers  resorted  to  combinations  to  restrict  their 
output  and  to  maintain  prices.  The  early  cartells  were  generally 
quite  Hmited  as  respects  the  commodities  and  the  region  included 
in  the  agreement.  The  first  important  exception  to  this  (apart 
from  rail  pools)  was  the  combination  of  German  RolHng  Mills, 
which  originated  in  1886  in  Silesia  and  expanded  to  include  the 
whole  country.  It  exercised  a  very  marked  influence  over  the 
German  iron  trade  down  to  its  dissolution  in  1893,  in  the  face  of 
new  competition.  The  head  of  this  combination,  Caro,  declared 
at  the  time  that  it  failed  because  a  cartell  of  rolled  products 
could  not  stand  alone :  it  was  necessary  to  cartell  the  raw 
materials  and  the  finished  products  also.  At  that  time,  however, 
the  producers  of  raw  materials  —  coal  and  pig  iron  —  had  not 
been  able  to  extricate  themselves  from  the  position  into  which 
their  previous  overdevelopment  had  brought  them.      They  were 


840  TRUSTS,    POOLS   AND   CORPORATIONS 

also  facing  a  constant  decline  in  prices,  owing  to  rapid  reduc- 
tions in  the  cost  of  production  due  to  technical  improvements. 
The  rolling  mills  and  the  manufacturers  of  finer  wares  were  in  a 
relatively  favorable  situation.  They  often  got  their  raw  mate- 
rial under  cost.  The  large  mixed  works,  or  those  which  com- 
bined the  production  of  raw  materials  with  the  manufacture  of 
commercial  products,  complained  of  the  disadvantage  at  which 
they  were  placed  as  compared  with  the  straight  rolling  mills 
{rcine  Walzivei'ke\  There  was  no  advantage  at  that  time  for  a 
rolling  mill  to  acquire  coal  mines  or  to  establish  blast  furnaces, 
and  hence  the  policy  of  combining  the  various  stages  of  pro- 
duction, which  had  been  quite  conspicuous  at  an  earlier  period 
in  the  Ruhr  district,  did  not  find  frequent  illustration  at  this 
time. 

Fundamental  changes  appear  in  the  general  conditions  of  the 
industry  at  the  beginning  of  the  nineties.  A  tolerably  success- 
ful pig  iron  cartell  had  been  established  in  the  Ruhr  in  1886, 
but  it  was  not  until  the  Coke  Syndicate  was  accomplished  in 
1890  that  a  secure  basis  was  formed.  The  iron  industry  was 
still  in  a  weak  position.  In  1892  the  pig  iron  producers  of  the 
Ruhr  and  the  Minette  got  together,  while  a  pig  iron  cartell  was 
formed  in  Siegerland  two  years  later.  The  ore  production  in 
Siegerland  was  combined  in  the  same  year.  In  the  Minette  the 
ore  was  almost  entirely  controlled  by  the  blast  furnaces.  More 
important  than  all  of  these  was  the  formation  of  the  Coal  Syn- 
dicate in  1893.  This  powerful  combination  dominated  the 
whole  industry  during  the  ensuing  decade.  Thus  the  founda- 
tions were  laid  for  a  new  regime  in  the  iron  trade,  in  which 
those  who  controlled  the  raw  materials  were  to  have  a  great 
advantage.  The  days  of  cut-throat  competition  between  mining 
companies,  in  which  the  iron  manufacturer  could  speculate  on 
the  demand  for  finished  products  with  the  assurance  that  the 
raw  material  would  be  abundant  and  cheap,  were  over.  The 
new  fuel  cartells  were  founded  on  the  principle  of  monopoly 
control,  and  the  pig  iron  cartells  partook,  to  some  extent,  of  that 
character  also.  The  combinations  among  the  manufacturers  of 
iron  products  did  not  keep  pace  with  these  developments  among 
the  producers  of  raw  materials.     The  cartell  of  German  Rolling 


THE   GERMAN   STEEL  SYNDICATE  841 

Mills  was  dissolved  in  1893,  and  no  general  combination  ap- 
peared to  take  its  place.  The  rail  pool  seems  to  have  maintained 
a  continuous  existence,  but  the  beam  pool  was  dissolved  about 
1892,  though  reorganized  shortly  after. 

In  1 894-1 895  a  marked  improvement  appeared  in  the  com- 
mercial situation  in  general,  and  in  the  iron  trade  in  particular, 
which  lasted  until  1900.  Although  some  of  the  earlier  cartells 
may  have  been  ^^  Kinder  der  Noth,"  the  period  of  prosperity 
furnished  apparently  a  healthful  environment  for  growth. 

The  most  important  event  of  this  period  was  the  establishment 
of  a  half  products  cartell.  This  innovation  was  a  consequence 
of  new  technical  conditions,  and  particularly  the  development 
of  great  steel  mills  for  the  production  of  Thomas  or  basic  steel. 
The  characteristic  products  of  these  steel  mills  are  rails,  beams, 
and  half  products  (ingots,  billets,  sheet  bars,  etc.).  The  half 
products  are  the  raw  material  of  the  rolling  mills.  The  large 
steelworks  found  that  the  straight  rolling  mills  were  not  keep- 
ing pace  with  their  development,  and  that  it  was  safer,  as  well 
as  more  profitable,  to  work  up  their  own  crude  steel  to  a  large 
extent.  They  were  generally  mixed  works,  controlling  their 
own  supplies  of  fuel,  ore,  and  pig  iron.  These  works  formed 
the  Half  Products  Syndicate  {Halbsetigverband),  and  this  cartell, 
combined  with  the  rail  and  beam  pools,  was  the  immediate  fore- 
runner of  the  present  Steel  Syndicate.  At  first,  however,  they 
had  a  price  agreement  simply,  and  it  was  somewhat  later  (1899) 
that  the  sale  of  half  products  was  syndicated.  This  cartell  soon 
included  all  the  great  steelworks  of  western  Germany.  The 
works  supplied  the  straight  rolling  mills  with  their  raw  material, 
and  at  the  same  time  competed  with  them  in  the  manufacture 
and  sale  of  rolled  products.  This  put  the  rolling  mills  in  a  dan- 
gerous position,  because,  technically,  they  were  no  match  for 
the  great  steelworks.  In  1897  a  comprehensive  but  compli- 
cated cartell  was  established  between  the  pig  iron  producers  of 
the  Ruhr,  the  Minette,  and  Siegerland.  In  the  period  between 
1895  and  1904  the  principal  cartells  established  for  rolled  prod- 
ucts were  as  follows:  heavy  sheets  and  rods  in  1897,  wire  nails 
in  1898,  and  light  sheets  in  1902.  The  rolling  mills  failed,  how- 
ever, to  cartell  steel  bars.     In  Silesia  rolled  products  were  effec- 


842  TRUSTS,   POOLS  AND   CORPORATIONS 

lively  cartelled  ever  since  1887,  in  one  form  or  another.  These 
cartells  do  not  comprise,  by  any  means,  all  of  those  found  in  the 
steel  industry  during  this  period,  but  were  the  most  important 
connected  with  the  development  of  organization  in  the  steel 
trade. 

The  development  of  cartells  in  various  steel  products  called 
forth  protective  organizations  among  the  consumers.  An  im- 
portant organization  of  this  sort  was  the  Rhenish-Westphalian 
Purchase  Association  for  pig  iron,  which  was  established  in  1901. 
More  important  than  this  was  the  Association  for  the  Protec- 
tion of  the  Interests  of  the  Consumers  of  Half  Products  which 
was  formed  in  1902.  This  included  forty-two  concerns,  mostly 
straight  rolling  mills,  with  a  demand  (in  1903)  for  560,000  tons. 
There  were  numerous  other  purchasing  combinations,  especially 
during  the  recent  crisis. 

The  reasons  for  the  formation  of  the  Steel  Syndicate,  accord- 
ing to  an  official  statement  made  to  the  government,  were  sub- 
stantially as  follows :  The  discovery  of  the  Thomas  or  basic 
process  had  made  practicable  the  utilization  of  the  immense  de- 
posits of  phosphoric  ore  in  the  Minette  district,  and  had  given 
rise  to  a  number  of  large  steelworks  adapted  to  that  purpose. 
This,  in  turn,  had  induced  the  existing  steelworks  to  modernize 
and  enlarge  their  plants,  which  caused  an  overproduction  of- 
steel,  and  imposed  upon  the  steelworks  the  necessity  of  com- 
bining to  restrict  their  output.  The  earlier  efforts  in  the  way 
of  price  agreements  proved  ineffectual,  and  made  necessary  the 
establishment  of  stronger  combinations.  Strong  cartells  thus 
established  in  various  steel  products  proved  defective  also,  be- 
cause they  lacked  control  over  the  export  trade,  as  well  as  a 
comprehensive  oversight  of  the  market.  The  Steel  Syndicate 
was  formed,  therefore.  Math  the  intention  of  bringing  about  a 
harmonious  action  in  all  lines  of  steel  production.  The  first 
step  was  to  secure  an  effective  combination  of  the  heavy  rolled 
products  (half  products,  rails,  and  structural  steel),  and  these 
products  could  be  more  easily  brought  into  a  combination  be- 
cause they  were  made  to  a  great  extent  by  a  limited  number  of 
large  mixed  works,  which  had  a  certain  economic  likeness.  The 
next  step  was  to  bring  about  a  cartell  for  the  light  rolled  prod- 


THE   GERMAN   STEEL  SYNDICATE  843 

ucts.  This,  however,  had  not  gone  beyond  a  determination  of 
quotas,  and  awaited  an  agreement  with  the  outside  straight  roll- 
ing mills  and  the  Siemens-Martin  (open  hearth)  steel  mills  be- 
fore it  could  be  firmly  established. 

The  project  for  the  Steel  Syndicate  was  first  broached  in  a 
practical  sense  in  the  autumn  of  1902.  The  chief  spirit  in  the 
movement  was  Adolf  Kirdorf,  the  head  of  the  Half  Products 
Syndicate.  After  preliminary  preparations  a  meeting  was  held 
in  February,  1903,  which  chose  a  commission  to  work  up  a  plan. 
This  plan  came  up  for  acceptance  in  the  autumn  of  the  same 
year.  There  were  the  usual  protracted  negotiations,  but  finally 
all  of  those  works  whose  adhesion  was  regarded  as  vital  were 
secured  by  various  compromises  and  concessions,  except  Krupp, 
Phoenix,  and  Westfaelische  Stahlwerkc.  The  agreement  was 
ratified  nevertheless  on  March  i,  1904,  and  almost  immediately 
after  Krupp  joined  in  consideration  of  an  enlarged  quota.  It 
was  deemed  essential,  however,  that  Phoenix  should  enter  the 
combination,  and  the  newly  formed  Syndicate  applied  all  its 
commercial  and  financial  influence,  especially  with  the  Coal 
Syndicate  and  the  banks,  to  achieve  its  purpose,  treating  it  as  a 
"scab"  concern.  The  management  of  Phoenix  refused  to  join 
because  they  regarded  the  quota  allotted  to  them  as  insufficient. 
The  Syndicate  soon  succeeded,  chiefly  through  the  influence  of 
the  great  banks,  in  getting  the  shareholders  of  Phoenix  to  re- 
verse the  policy  of  the  management.  The  vigorous  and  drastic 
measures  which  the  syndicate  took  to  accomplish  its  purpose 
excited  a  good  deal  of  unfavorable  criticism,  but  Phoenix  has 
accepted  the  situation  with  a  tolerably  good  grace.  As  a  matter 
of  fact,  its  profits  have  shown  a  large  increase. 

The  Stahlwerksverband  went  into  effect  on  March  i,  1904. 
It  was  concluded  for  a  term  ending  on  June  30,  1907;  and,  in 
case  there  is  no  written  objection  to  its  continuance  by  any  mem- 
ber before  December  31,  1906,  it  is  to  stand  until  June  30,  191 2. 
The  character  of  this  agreement,  in  respect  to  matters  of  gen- 
eral interest,  is  substantially  as  follows  : 

The  steelworks  owners  in  the  combination  have  an  agree- 
ment whereby  they  obligate  themselves  to  sell  certain  products 
to  their  central  company,  which  is  called  the  Stahlwerksverband. 


844  TRUSTS,   POOLS  AND   CORPORATIONS 

They  agree  further  to  meet  in  a  general  assembly  to  perform 
certain  duties  imposed  by  the  agreement  on  that  body,  and  also 
to  submit  to  the  directions  of  certain  organs  provided  for  in  the 
agreement.  The  Stahlwerksverband,  or  central  company,  has, 
on  its  part,  an  agreement  with  the  steelworks  owners  to  pur- 
chase all  of  their  products,  of  the  kinds  specified,  and  to  sell 
them  again  under  the  terms  fixed  for  the  agreement.  The 
Assembly  of  the  Steelworks  Owners  elects  an  Advisory  Council 
{Beirat),  a  body  called  the  Commission,  and  several  subordinate 
commissions.  The  Stahlwerksverband  has  the  usual  statutory 
organs  of  a  company ;  namely.  Supervisory  Council,  Managing 
Directors  (  Vorstand),  and  General  Assembly.  In  the  Assembly 
of  Steelworks  Owners  each  member  has  one  vote  for  every 
10,000  tons  quota  of  production.  Some  of  the  chief  powers  of 
this  body  are  :  (i)  election  of  Beirat  and  Commission,  (2)  admis- 
sion of  new  members,  (3)  determination  of  eventual  restriction 
of   quotas,  (4)  assent  to  sales  or  leases  of  plants  by  owners, 

(5)  determination  of  penalties,  (6)  dissolution  of  agreement  in 
case  of  reappearance  of  competition,  and  (7)  provision  for  the 
inclusion  of  light  rolled  products  (B-Products)  in  syndicate  sales. 
The  Beirat  is  composed  of  members  elected  by  the  Steelworks 
Owners,  each  owner  or  group  of  owners  having  the  right  to 
elect  .one  member  for  every  500,000  tons  of  quotas.  The  mem- 
bers of  the  Beirat  must  be  chosen  from  the  General  Assembly. 
The  chief  powers  of  the  Beirat  are  ( i )  holding  members  of  the 
combination  to  their  agreement,  (2)  provision  of  rules  regarding 
selling  prices  and  terms  of  sale,  (3)  determination  of  increase  of 
quotas  for  B-Products  (see  below),  (4)  determination  of  prices 
to  be  paid  the  Steelworks  Owners,  (5)  disposition  of  reserves, 

(6)  imposition  of  penalties,  and  (7)  authorization  to  Vorstand  to 
conclude  agreements  with  competitors,  etc.  The  third  organ  of 
the  cartell  is  the  Commission,  which  is  composed  of  eight  mem- 
bers, and  which  has  the  following  powers:  (i)  classification  of 
commodities,  and  (2)  determination  of  "scale  prices,"  com- 
parative weights  and  compensation  for  unusual  specifications. 
Among  the  subordinate  commissions  the  freight  commission 
may  be  specially  mentioned. 

The    selling    company    is    called    the    "  Stahlwerksverband 


THE   GERMAN   STEEL   SYNDICATE  845 

Aktiengesellschaft."  It  is  located  in  Diisseldorfr^'Thc  pur- 
pose of  the  company,  as  described  in  the  by-laws,  includes  not 
only  the  purchase  and  sale  of  iron  and  steel  products  of  all 
kinds,  but  also  the  acquisition  and  operation  of  all  kinds  of 
enterprises  which  are  connected  with  the  storage  and  trans- 
portation of  iron  and  steel  products.  This  company  has  a  share 
capital  of  400,000  marks  in  registered  shares,  which  are  not 
transferable  with  the  consent  of  the  General  Assembly.  This 
capital  is  nominal  in  amount,  because  the  company,  although  it 
does  an  enormous  business,  is,  in  effect,  only  an  agent  of  the 
Steelworks  Owners,  and  sells  for  cash.  The  Managing  Di- 
rectors, or  the  Vorstand,  conduct  the  business  of  the  company, 
which  has  a  very  large  and  highly  organized  bureau.  There 
is  one  department  for  accounting,  statistics,  taxation,  freights, 
legal  work,  and  for  dealing  with  the  public  authorities,  and  a 
department  for  the  sale  of  each  of  the  three  kinds  of  heavy 
rolled  products. 

The  commodities  covered  by  the  agreement  are  specifically 
described.  They  include  (i)  the  production  of  crude  steel  and 
forge  iron  ;  (2)  the  purchases  of  the  same,  and  also  of  rolled  half- 
products  and  products  enumerated  under  the  two  following 
specifications  ;  (3)  the  production  of  half  products,  railway  ma- 
terial, and  structural  steel ;  (4)  the  production  of  bars,  rods, 
heavy  and  light  sheets,  tubes,  railway  axles,  wheels  and  tires, 
forge  pieces,  cast  steel  pieces,  etc.,  so  far  as  not  made  from 
material  under  3  and  4,  but  directly  from  crude  steel ;  and 
(5)  the  purchase  from  Steelworks  Owners  of  commodities 
enumerated  under  3,  if  they  are  for  the  plants  of  the  Steelworks 
Owners,  and  if  the  products  thereof  are  sold  by  the  cartell. 
The  products  enumerated  under  i  and  3  are  called  A-Products, 
and  those  under  4  are  called  B-Products.  The  Stahlwerksver- 
band  buys  from  the  Steelworks  Owners  all  the  products  which 
are  offered  for  sale  under  the  group  A-Products,  and  sells  the 
same  for  the  general  account.  For  B-Products,  on  the  other 
hand,  the  amount  of  production  is  fixed,  but  the  sale  is  left  to 
the  Steelworks  Owners  individually,  or  to  such  other  cartells  as 
they  may  belong  to. 

The   quotas   of  the  Steelworks  Owners  for  the   A-Products 


846  TRUSTS,   POOLS   AND    CORPORATIONS 

sold  by  the  Stahlwerksverband  are  based  on  the  amount  of 
crude  steel  originally  allotted  to  each  by  the  agreement.  This 
is  called  the  principal  quota,  and  is  divided  into  three  "  group 
quotas";  namely,  (i)  crude  steel  and  half  products  for  direct 
sale,  (2)  railway  material,  and  (3)  structural  steel.  The  group 
quotas  are  given  in  crude  steel  equivalents.  It  is  the  duty  of 
the  selling  company  to  distribute  the  orders  so  that  each  con- 
cern shall  have  its  share  according  to  its  quotas.  There  are 
various  particular  provisions  in  this  connection.  If  the  total  of 
the  quotas  is  increased,  they  must  all  be  increased  in  proportion  ; 
but,  if  any  concern  is  unable  to  maintain  the  increased  output 
allotted  to  it,  the  works  which  produce  the  excess  are  required 
to  pay  those  which  produce  less  a  contribution  of  5  marks  per 
ton.  Certain  exchanges  in  quotas  between  different  plants  are 
allowed,  with  the  consent  of  the  Vorstand,  and  it  is  also  pro- 
vided that  the  Vorstand  can  make  arrangements  whereby  certain 
works  shall  receive  the  bulk  of  orders  for  unusual  specifications. 
Both  these  provisions  aim  at  a  greater  economy  of  production 
by  a  division  of  labor.  Each  Steelworks  Owner  must  fulfill 
orders  allotted  him ;  but,  in  case  they  involve  changes  in  his 
equipment,  compensation  must  be  made.  Where  a  concern  uses 
its  own  products,  the  Stahlwerksverband  does  not  intervene  as 
a  buyer  or  seller. 

The  seUing  prices  are  fixed  by  the  Vorstand  under  the  guid- 
ance of  rules  laid  down  by  the  Beirat.  The  Steelworks  Owners 
receive  a  minimum  price  ("table  price  ")  originally,  and  after- 
ward what  excess  remains  from  the  actual  proceeds  after  deduc- 
tion of  the  various  expenses  of  administration,  reserve,  rebates, 
etc.,  incurred  by  the  selling  company.  It  is  evident  that  the 
only  way  open  for  any  particular  concern  to  increase  its  profits 
is  to  reduce  its  costs  of  production.  The  "  table  prices  "  are 
for  Thomas  or  basic  Bessemer  steel.  Extra  prices  are  allowed 
for  commodities  of  superior  grade,  based  on  the  extra  proceeds 
of  sale.  A  particular  concern  may  receive  higher  prices  than 
others  if  it  is  clear  that  its  product  commands  a  higher  price  in 
the  market  on  account  of  quality.  Important  features  of  the 
price  regulation  are  the  freight-basing  points.  In  the  domestic 
trade  the  rules  are  as  follows  :  for  half  products  there  are  five 


THE   GERMAN  STEEL   SYNDICATE  847 

bases,  and  the  purchaser  is  quoted  a  price  from  the*Sase  nearest 
to  his  works ;  for  railway  material  the  base  is  the  producing 
concern ;  for  structural  steel  the  base  is  Diedenhofen.  In  the 
foreign  trade  the  basing  point  is  the  plant  most  favorably  located 
for  the  purchaser.  These  rules  represent  partly  compromises 
between  different  interests  in  the  combination  and  partly  at- 
tempts to  economize  freight  charges.  For  the  foreign  trade,, 
for  example,  each  concern  has  the  advantage  or  disadvantage 
resulting  from  its  geographical  situation  \^-ith  regard  to  the 
destination.  In  domestic  railway  material,  on  the  other  hand, 
geographical  situation  has  no  effect  Export  bounties  which 
are  received  from  other  cartells  {e.g.  Coal  Syndicate  or  Pig  Iron 
S}Tidicate)  are  distributed  in  such  a  manner  that  the  Steelworks 
Owners  w^ho  make  the  commodities  for  which  e.xport  bounties 
are  received  get  their  share  thereof,  whether  their  products  are 
exported  or  not. 

For  the  B-Products  the  principal  quota  is  the  weight  of  crude 
steel  required  to  make  them.  This  is  fixed  for  each  concern  in 
the  original  agreement.  A  concern  can  reduce  its  sale  of  B- 
Products  at  will.  On  the  other  hand,  it  cannot  increase  its 
sales  without  leave  from  the  Beirat.  If  a  concern  sells  more 
than  its  allotted  quota,  it  must  pay  20  marks  per  ton  for  such 
excess  sales. 

The  agreement  pro\ddes  for  a  "reser\'e,"  which  is  intended 
principally  for  the  promotion  of  the  export  trade  or  for  fighting 
competitors.  It  is  acquired  by  deductions  made  from  the  pro- 
ceeds of  sale  on  the  basis  of  the  "  table  prices."  This  assess- 
ment is  fixed  by  the  Assembly  of  Steelworks  Owners,  with  the 
limitation  that  it  cannot  exceed  3  per  cent  of  the  sums  paid 
under  the  "  table  price  "  payments.  The  Steelworks  Owners  are 
prohibited  from  selling  or  leasing  their  plants  without  the  con- 
sent of  the  Assembly  of  Steelworks  Owners,  but  this  assent 
must  be  given  if  proper  guarantees  are  pro\-ided  for  the  fulfil- 
ment of  cartell  obligations.  On  the  other  hand,  the  Steelworks 
Owners  are  forbidden  to  buy  or  operate  any  outside  plant  that 
makes  A-  or  B-Products  or  to  erect  new  plants  for  the  produc- 
tion of  those  commodities.  The  Vorstand  has  the  right  to  super- 
vise all  concerns,  and  to  inspect  plants,  books,  and  papers,  in 


848  TRUSTS,    POOLS   AND    CORPORATIONS 

order  to  insure  due  performance  of  obligations.  Detailed  pro- 
visions are  made  regarding  fines  and  penalties.  An  arbitration 
court  is  established  also,  which  (to  the  exclusion  of  the  courts  of 
law)  has  jurisdiction  over  disputes  concerning  the  obUgations  of 
the  parties  to  the  agreement.  In  case  new  competition  appears 
during  the  term  of  the  cartell  with  a  production  amounting  to 
5  per  cent  of  the  cartell  in  A-  or  B-Products,  according  to  the 
opinion  of  the  Beirat,  the  agreement  may  be  canceled. 

The  original  quotas  of  the  members  of  the  Stahlwerksverband 
for  different  products  are  shown  in  the  table  on  opposite  page. 

In  addition  to  the  quotas  given  above,  certain  concerns  have 
the  privilege  of  purchasing  a  fixed  amount  of  steel.  The  only 
important  allowance  is  that  of  Phoenix,  which  amounts  to 
100,000  tons.  Besides  this  certain  other  works  are  to  receive  in 
the  future  certain  additions  to  their  quotas.  Here,  again,  there 
is  only  one  case  in  which  a  considerable  increase  is  provided 
for;  namely,  Krupp,  which  by  April,  1907,  will  be  allowed 
706,000  tons  for  its  total  quota.  Taking  the  total  quotas,  the 
geographical  distribution  is  as  follows  :  for  the  Rhenish-West- 
phalian  works,  54  per  cent ;  for  the  works  in  the  Saar,  Lorraine, 
and  Luxemburg,  32  per  cent;  for  Upper  Silesia,  7  per  cent; 
and  the  remainder  (7  per  cent)  in  various  parts  of  Germany.    • 

The  proportion  of  the  production  of  the  Stahlwerksverband 
to  the  total  production  of  Germany  is  estimated  at  about  90  per 
cent.  All  the  important  steelworks  which  were  deemed  to 
come  within  the  scheme  of  organization  except  one  —  the  West- 
falische  Stahlwerke  —  are  included  in  the  agreement.  Several 
works  have  been  added  since  then.  There  does  not  seem  to  be 
any  immediate  likelihood  of  new  competition  appearing.  To 
start  a  new  first-class  steelworks  with  an  independent  supply 
of  coal  and  coke  would  cost,  it  is  said,  fifty  million  marks. 
Voelcker  says,  "  The  German  Stahlwerksverband  represents  for 
the  cartells  in  the  iron  industry,  not  the  keystone  of  the  arch, 
but  rather  the  foundation  of  a  new  grouping."  The  chief  pur- 
poses of  the  cartell  are  officially  stated  to  be  ( i )  the  maintenance 
of  the  domestic  market,  (2)  the  full  occupation  of  the  works, 

(3)  the  simplification  of  working  programs  of  the  works,  and 

(4)  the    elimination  of    competition    among    German  works    in 


THE   GERMAN   STEEL   SYNDICATE 


849 


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8  so  TRUSTS,    POOLS   AND   CORPORATIONS 

foreign  markets.  Adolf  Kirdorf  was  elected  as  the  first  head 
of  the  Syndicate. 

It  is  difficult  to  estimate  the  capital  value  of  the  concerns  in 
the  Steel  Syndicate.  They  include,  of  course,  besides  steel 
mills,  coal  mines,  coke  works,  blast  furnaces,  etc.  If  the  share 
capital  at  the  market  quotation  is  taken,  and  to  this  is  added  the 
outstanding  funded  debt,  a  fairly  representative  figure  is  ob- 
tained. On  this  basis,  using  figures  chiefly  for  1904,  the  follow- 
ing computation  has  been  made  from  the  date  in  the  Dortnuinder 
JaJu'bucJi  and  Salings  Boersenpapiere.  For  twenty  concerns  in 
the  Syndicate,  embracing  63  per  cent  of  the  total  quotas  for  A- 
and  B-Products,  the  total  capital  value  is  computed  to  be  about 
958.27  miUion  marks.  If  the  same  proportion  be  appHed  to  the 
aggregate  quotas  of  the  syndicated  concerns,  the  total  capital  value 
would  amount  to  1521  million  marks,  or  about  $362,000,000. 

The  Steel  Syndicate  aimed  at  a  national  organization  of  the 
industry,  and  several  concerns  in  Upper  Silesia  were  included  in 
the  combination.  The  steel  producers  of  that  region,  however, 
went  further,  and  established  a  local  organization,  which  in 
some  respects  was  more  complete  than  the  Steel  Syndicate. 
The  distance  of  Upper  Silesia  from  accessible  markets  makes  it 
necessary  for  the  steel  works  to  manufacture  the  finer  products 
which  pay  iDetter  for  distant  shipment.  The  German  Rolling 
Mill  Cartell,  which  was  dissolved  in  the  early  nineties,  left 
behind  it  in  Silesia  a  local  cartell  which  included  all  but  one 
concern,  and  this  organization  lasted  down  to  the  end  of  1904. 
It  was,  however,  inadequate,  and  hence  some  of  the  Silesian 
works  joined  the  Steel  Syndicate.  This  led  to  the  organization 
of  a  local  steel  combination  on  December  16,  1904,  which  went 
into  effect  at  the  beginning  of  1905.  This  was  called  the 
Oberschlesische  Stahlwerksverband  G.  m.  b.  H.  It  includes 
the  eight  steel  works  of  Upper  Silesia,  one  in  Berlin,  and  one  in 
Danzig.  The  term  of  the  agreement  is  fixed  from  January  i, 
1905,  to  June  30,  1907,  although  an  earlier  dissolution  was 
possible  under  certain  contingencies.  The  agreement  in  its 
general  form  is  modeled  on  that  of  the  greater  Steel  Syndicate, 
but  it  differs  in  one  very  important  particular.  As  there  is  little 
of  crude  steel  or  heavy  rolled  products  made  for  sale,  these  are 


THE    GERMAN    STEEL   SYNDICATE  851 

not  syndicated,  but  the  light  rolled  products  arc  cartelted  instead. 
Some  of  these  light  rolled  products  are  sold  by  the  syndicate, 
but  the  others  are  simply  regulated  as  to  output.  There  were 
some  difficulties  in  the  beginning  which  threatened  to  break  it 
up,  but  these  were  settled,  and  soon  after  the  five  remaining 
steel  works  in  Upper  Silesia  became  members  of  the  larger  or 
"  German  "  Steel  Syndicate. 

One  of  the  characteristic  developments  of  industrial  combina- 
tions has  been  the  suppression  of  the  middlemen.  The  Steel 
Syndicate  furnishes  some  striking  illustrations  of  this  fact. 
Before  the  formation  of  the  syndicate  the  dealers  in  structural 
steel  had  been  organized  in  five  groups  by  the  Bean  Syndicate 
and  these  groups  were  recognized  by  the  Steel  Syndicate  after 
it  was  established.  The  members  of  these  groups  of  dealers 
agree  to  sell  according  to  certain  minimum  prices  and  conditions, 
and  each  group  has  a  distinct  territory.  Similar  organizations 
have  been  formed  in  Switzerland,  Denmark,  Sweden,  and 
Norway.  The  Steel  Syndicate  declares  that  its  special  purpose 
in  promoting  and  recognizing  them  has  been  to  obtain  a  better 
view  of  the  market,  and  to  exercise  a  greater  control  over  it. 
The  dealers  have  submitted  to  the  inevitable  with  what  grace 
they  could,  but  they  complain  that  the  profit  (a  commission 
practically)  is  too  small.  For  the  other  products,  which  the 
syndicate  sells  directly,  —  namely,  half  products  and  railway 
material, — the  conditions  of  trade  are  different;  i.e.  they  are 
both  sold  direct  to  the  consumers  in  the  domestic  market,  and 
also  to  some  extent  abroad.  In  the  most  important  foreign 
market  of  the  syndicate,  —  namely,  London,  —  the  former  agents 
of  the  various  companies  have  been  organized  into  a  limited  lia- 
bility company  over  which  the  syndicate  has  taken  pains  to 
secure  complete  control,  both  of  personnel  and  stockholders. 
Similar  agencies  have  been  established  to  represent  the  svndi- 
cate  in  Amsterdam  and  at  Brussels.  Further,  in  order  to  get  a 
better  view  of  the  English  market,  the  syndicate  has  stopped 
selling  f .  o.  b.  Continental  ports,  and  sells  instead  c.  i.  f.  English 
ports.  The  syndicate  has  even  introduced  sales  with  delivery  at 
works  to  the  English  consumer. 

It  would  be  difficult  to  appreciate  properly  the  policy  of  the 


852  TRUSTS,   POOLS   AND   CORPORATIONS 

Steel  Syndicate,  especially  on  account  of  the  brief  term  of  its 
existence,  without  some  reference  to  the  previous  movement  of 
production  and  prices.  Before  speaking,  however,  of  any  par- 
ticular feature,  it  is  desirable  to  note  a  few  of  the  leading  facts 
regarding  the  steel  market  in  recent  years.  The  period  since 
1895  may  be  approximately  described  as  follows:  From  1895 
to  1900  there  was  a  great  boom,  which  culminated  in  a  short 
period  of  high  prices  in  1899- 1900,  and  terminated  in  a  crisis 
in  the  latter  year,  which  brought  on  a  general  and  very  serious 
collapse.  A  period  of  depression  followed,  which  may  be  said 
to  cover  the  years  1901  to  1902.  During  1903  improvement 
was  evident,  and  since  then  the  steel  trade  has  been  active,  if 
not,  generally  speaking,  remarkably  profitable.  The  last  half 
of  1905  has  brought  an  extraordinary  revival  of  activity. 

The  raw  material  cartells  had  established  themselves  at  the 
beginning  of  the  period,  and  occupied  a  favorable  position 
throughout.  The  cartells  which  existed  in  finished  products 
were  generally  more  loosely  formed,  and  their  policy  both  in 
production  and  prices  was  less  conservative.  When  the  depres- 
sion came,  they  were  in  a  weak  position,  and  were  more  eager 
to  form  combinations.  The  raw  material  cartells  had,  however, 
the  advantage,  and  succeeded  in  shifting  the  greater  part  of  the 
losses  occasioned  by  the  hard  times  on  to  the  manufacturing 
branches.  The  former  were  able,  that  is,  to  maintain  their  prices 
to  a  large  extent,  while  the  latter  had  to  reduce  theirs,  and  to 
accept  greatly  diminished  margins.  The  general  policy  of  all 
producers  was  to  keep  up  their  production,  and  to  sell  abroad 
at  any  cost  what  they  could  not  find  a  market  for  at  home. 
The  table  on  opposite  page  shows  the  movement  of  production 
in  some  leading  lines. 

An  inspection  of  this  table  shows  a  great  increase  between 
1895  and  1900  for  all  the  products  given,  except  rods  and  tin 
plate.  The  decrease  in  production  in  1901  is  equally  general, 
with  a  slight  recovery  in  1902.  With  1903  production  quite 
generally  forged  ahead  of  previous  figures,  and  has  continued 
to  increase  since.  The  steadiness  with  which  production  has 
increased  in  Germany  is  remarkable.  Voelcker  states  that  the 
normal  increase  in  the  demand  for  steel  in  Germany  is  about 


THE  GERMAN   STEEL  SYNDICATE 


853 


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854  TRUSTS,    POOLS   AND    CORPORATIONS 

420,000  tons  per  annum.  The  pig  iron  production  in  Germany 
during  the  nine  years  ending  1904  increased  at  an  average  rate 
of  510,000  tons  per  annum.  The  production  of  pig  iron  in  1904 
showed  practically  no  increase  over  1903,  while  half  products 
declined  slightly. 

The  production  policy  of  the  Steel  Syndicate  during  the  period 
of  two  years  since  its  establishment  has  not  been  characterized  by 
any  extraordinary  features.  The  syndicate  has  published  the 
statistics  of  production  only  for  A-Products.  The  shipments  of 
these  products  (reckoned  in  crude  steel  weight)  were  as  follows  : 

March  i,  1904,  to  February  28,  1905  (12  mos.)  .  .  .  4,533,805  tons,  A-Products 
March  i,  1905,  to  December  31,  1905  (10  mos.)  .     .     .     4,517,512  tons,  A-Products 

The  production  of  the  first  business  year  was  about  1.4  per 
cent  less  than  the  quotas  prevailing  for  that  period.  The  pro- 
duction for  the  first  eight  months  of  the  second  business  year, 
however,  was  about  9.9  per  cent  greater  than  the  prevailing 
quotas  for  that  period.  For  the  chief  subdivisions  of  A-Prod- 
ucts the  shipments,  reckoned  in  crude  steel  weights,  were  as 
follows : 

Structural 
Period  Half  Products       Railway  Material  Steel 

March  I,  1904,  to  February  28, 

1905  (12  mos.)      ....   1,599,598  tons  1,394,623  tons  1,529,435  tons 

March  i,  1905,10  December  31, 

1905  (10  mos.)      ....   1,661,649  tons  1,399,960  tons  1,455,903  tons 

Comparing  the  same  periods,  the  shipments  during  the  first 
ten  months  in  the  second  year  exceeded  the  shipments  during 
the  first  ten  months  of  the  first  year  as  follows  :  for  all  A-Prod- 
ucts by  18  per  cent,  for  half  products  by  23  per  cent,  for  rail- 
way material  by  20.4  per  cent,  and  for  structural  steel  by  1 1  per 
cent.  The  production  policy  of  the  syndicate  as  indicated  by 
these  figures  shows  a  decided  tendency  towards  expansion.  It 
is  instructive  to  compare  the  policy  of  the  Steel  Syndicate  with 
the  Half  Products  Syndicate  which  preceded  it.  The  following 
figures  for  half  products  are  m.  fi7iisJied  weights  : 

Sales  of  Half  Products, 
Period  Finished  Weights 

March  i,  1902,  to  February  28,  1903 1,460,637 

March  i,  1903,  to  February  28,  1904 1,449,698 

March  i,  1904,  to  February  28,  1905 1,411,903 


THE   GERMAN   STEEL  SYNDICATE  S55 

The  sales  in  1904-05,  under  the  regime  of  thc^lccl  Syndi- 
cate, were  less  than  those  of  the  Half  Products  Syndicate.  This 
reduction  came  out  of  the  export  trade,  and  not  out  of  the  do- 
mestic supply,  as  is  shown  by  the  following  table  of  domestic 
sales : 

Domestic  Sale,  Half  Products, 
Period  Finished  Weights 

1902-03 737,621  tons 

1903-04 844,629  tons 

1904-05 1,018,277  tons 

The  data  regarding  the  movement  of  B-Products  are  very 
meager.  The  syndicate  does  not  generally  give  out  these  fig- 
ures. Kollmann,  however,  gives  a  statement  of  shipments  of 
B-Products  during  the  first  year  of  operation,  together  with 
the  quotas,  as  follows  : 

B-Products  Shipments  Quotas 

^^''s 1,718,211  tons  1,847,622  tons 

^o^^ 371,713  tons  434,230  tons 

Sheets 682,889  tons  714,927  tons 

A.\\es 306,599  tons  351,546  tons 

Tubes 48,226  tons  53»400  tons 

At  the  end  of  March,  1905,  the  syndicate  voted  to  increase 
the  quotas  for  bars  and  sheets  by  5  per  cent.  This  increase  be- 
came permanent  on  July  i,  1905.  The  total  allotment  for  A- 
Products  on  July  i,  1905,  was  4,864,485  tons,  as  compared  with 
4,614,225  tons  shortly  after  the  formation  of  the  combination. 
The  addition  of  five  more  concerns  in  Upper  Silesia  increased 
the  total  to  4,900,000  tons.  In  January,  1906,  the  quotas  for 
bars  and  sheets  were  increased  again  by  5  per  cent,  while  the 
quotas  for  rods  were  increased  10  per  cent.  The  total  increase 
of  quotas  over  the  original  quotas  are  as  follows :  bars  and  rods, 
10  per  cent ;  sheets,  15  per  cent. 

The  movement  of  prices  in  the  steel  trade  has  been  affected 
in  an  important  degree  by  the  existence  of  cartells  for  the 
various  products,  but  their  influence  on  prices  has  been  very 
unequal,  and  none  of  them  ever  had  complete  mastery  of  the 
situation.  The  following  table  shows  the  general  course  of  de- 
velopment for  the  chief  raw  materials  and  the  chief  manufac- 
tured products  during  recent  years  : 


856 


TRUSTS,    POOLS   AND   CORPORATIONS 


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THE   GERMAN    STEEL   SYNDICATE  857 

This  table  does  not  present,  of  course,  the  details  of  price 
movements,  and,  in  general,  it  does  not  show  the  extremes. 
For  example,  pig  iron  was  quoted  as  low  as  45  m.  in  1901  In 
Silesia  sheets  were  from  205  to  215  m.  at  the  beginning  of  1900, 
and  from  125  to  135  m.  at  the  end  of  the  year.  To  a  very  con- 
siderable extent,  also,  rebates  were  granted  on  the  prices  quoted, 
and  even  on  the  material  previously  sold.  Most  of  the  coke 
was  sold  for  igoo  and  1901  on  two-year  contracts  at  17m.;  and, 
though  the  market  quotations  ran  higher,  very  little  was  bought 
on  that  basis. 

An  inspection  of  the  price  table  shows  that  there  was  a 
general  advance  in  prices  from  1895  to  1900.  The  crisis  de- 
veloped in  the  middle  of  the  latter  year.  The  advances  appear 
quite  as  early  for  the  manufactured  products  as  for  the  raw 
materials,  and,  on  the  whole,  it  may  be  safely  asserted  that  they 
were  the  result  of  general  economic  influences,  and  that  there 
was  no  causal  relation  between  them.  Dr.  Voelcker,  in  his  im- 
partial and  judicious  summary  of  the  situation,  declares  that 
from  1895  to  1898  the  cartells  followed  a  moderate  price  policy, 
but  that  from  1899  to  1901  the  reverse  in  general  was  true. 
The  uncartelled  lines  got  high  prices  in  1899  and  1900,  owing 
to  the  favorable  market,  and  the  cartelled  lines  were  unable  to 
resist  the  temptation  to  put  up  their  prices  to  an  immoderate 
height  also.  The  fall  in  prices,  after  the  depression  set  in,  was 
relatively  greater  for  the  manufactured  products  than  for  raw 
materials  or  half  products,  and  it  came  sooner.  This  was  partly 
due  to  the  fact  that  the  raw  material  cartells  took  advantage  of 
their  strong  position  to  make  their  customers  take  their  supplies 
on  long  term  contracts ;  but  the  latter  were  also  to  blame,  as 
they  were  overanxious  to  get  supplies,  not  suspecting  that  a 
crisis  was  imminent.  The  two  chief  offenders  were  the  Coke 
Syndicate  and  the  Pig  Iron  Syndicate.  The  Steel  Syndicate,  at 
the  beginning  of  its  operations,  established  a  scale  of  domestic 
prices  for  certain  standard  products  of  basic  steel.  The  most 
important  prices  were  as  follows  : 

Crude  ingots     .     .     .     77.50  m.  per  ton  Structural  iron  105. 00- loS. 00  m.  per  ton 

Rolled  ingots  (blooms)  82.50  Rails     ....  112.00 

Billets 90.00  Ties      ....  105.00 

Sheet  bars   .     .     .     .     92.50 


858 


TRUSTS,   POOLS   AND   CORPORATIONS 


These  prices  prevailed  without  essential  modification  until 
November,  1905.  A  comparison  of  these  prices  with  those  of 
the  years  immediately  preceding  (1902  and  1903)  and  the  years 
before  the  boom  acquired  much  headway  {e.g.  1896  and  1897) 
tends  to  show  that  the  price  policy  of  the  Syndicate  has  been 
moderate.  EngHsh  reports  announce,  however,  a  general  5 
shilling  advance  for  half  products  of  the  Steel  Syndicate  in 
November,  1905,  and  predict  a  further  rise.  These  prices  look 
rather  high.  The  price  policy  of  the  syndicate,  as  far  as  the 
domestic  market  is  concerned,  was  enunciated  by  one  of  its 
directors.  Dr.  Voelcker,  as  follows  :  "  We  do  not  intend  to  allow 
our  prices  to  change  continually  with  the  fluctuations  of  the 
market.  We  do  not  desire,  namely,  to  raise  our  prices  suddenly 
and  rapidly,  if  the  conditions  are  very  favorable ;  we  do  not 
wish,  on  the  other  hand,  to  reduce  our  prices  in  bad  times,  with 
a  declining  demand ;  we  desire  to  keep  the  middle  course." 

The  syndicate  does  not  fix  the  prices  of  light  rolled  products. 
The  price  movement  for  some  of  the  principal  lines  is  shown  in 
the  followine:  table : 


PRICES  OF  LIGHT  ROLLED   PRODUCTS  1 


Date 

Bar  Steel 
(Converter) 

Hoops 

Boiler  Plate 
(Converter) 

Light  Sheets 
(Converter) 

Rods 
(Converter) 

1904 
January  i 

107-110 

12.250-127.50 

150 

115 

112.50-117.50 

April  I 

112 

125-130 

iSS 

115 

112. 50-117. 50 

July  I 

112-115 

122.50-127.50 

150 

115 

120 

October  i 

110-112 

122.50-127.50 

150 

115 

1 1 2.50-1 1 7.50 

190S 
January  i 

106-108 

122.50-127.50 

150-155 

"5 

112.50-117.50 

April  I 

iio-iis 

123 

150-155 

120-122.50 

125 

July  I 

no 

123-125 

— 

I 15-120 

125 

October  i 

110-112 

125-127.50 

130 

1 1 2-1 20 

125 

December  i 

1906 
January  i 

1 1 2-1 15 
115-118 

125-127.50 
130-132.50 

130-135 
130-135 

122.50-125 
126-130 

127.50 
132-50 

A  distinct  upward  movement  is  observable  in  the  last  half  of 
1905,  to  which  boiler  plate  forms  an  exception.  This  corre- 
sponded to  an  increase  in  consumption,  especially  in  the  domestic 

1  In  Marks. 


THE   GERMAN   STEEL  SYNDICATE  859 

market.  Comparing  these  prices  with  those  of  preceding  years, 
the  prices  of  bar  steel  were  unduly  low  ;  and  the  same  is  true 
also  for  light  sheets  and  for  rods  in  1904.  In  1905  the  prices 
of  light  sheets  moved  erratically,  and  were,  on  the  whole,  too 
low,  while  the  prices  of  rods  advanced  to  a  reasonably  good 
basis.  The  position  of  steel  bars  became  tolerably  good  only  at 
the  beginning  of  the  year  1906. 

The  burning  question  of  the  steel  trade  since  the  crisis  has 
been  the  position  of  the  straight  rolling  mills  {reine  Wahwcrkc) 
with  reference  to  the  mixed  steel  works  {gemiscJiten  Werke). 
The  latter  are  the  great  works  which  generally  have  their  own 
raw  materials,  and  combine  the  manufacture  of  heavy  and  light 
steel  products.  Though  for  a  time  in  the  seventies  and  eighties 
this  integration  in  industry  fell  into  some  disfavor,  it  is  accepted 
to-day  in  Germany,  as  elsewhere,  as  the  necessary  basis  for 
large  and  successful  operations.  Of  the  31  original  members  of 
the  Steel  Syndicate,  17  produce  coal,  25  iron  ore,  and  27  pig 
iron.  These  large  steelworks  produce  also  the  bulk  of  the 
light  rolled  products.  For  example,  they  produce  about  three- 
fourths  of  the  bar  steel  of  Germany.  Probably  the  straight  roll- 
ing mills  do  not  produce  over  one  seventh.  The  straight  rolling 
mills  are  almost  entirely  dependent  on  the  large  steelworks  for 
their  material,  and  they  are  at  a  disadvantage  both  in  the  manu- 
facture and  sale  of  light  rolled  products.  The  superiority  of 
the  steelworks  is  based  on  (i)  technical  superiority,  (2)  economy 
in  general  expenses,  and  (3)  economy  in  freights.  Their  tech- 
nical superiority  relates  almost  entirely  to  standard  commodities, 
produced  in  great  quantities,  and  is  found  chiefly  in  the  economy 
of  fuel  and  in  the  economy  of  construction  and  operation  of 
plant.  Considering  these  economies  only  so  far  as  they  relate 
to  the  rolling  of  the  light  products,  the  straight  rolling  mills 
concede  that  the  large  works  have  an  advantage  of  from  4  to  6 
marks  per  ton  in  rolling  crude  steel.  It  is  principally  a  ques- 
tion of  saving  heat  by  direct  rolling.  It  is  also  obvious  that  the 
construction  of  a  plant  for  a  continuous  and  uninterrupted 
process  is  more  economical.  This  factor,  as  well  as  that  of  sav- 
ing in  general  expenses,  which  is  equally  obvious,  is  difficult 
to  estimate.     The  saving  in  freight  is  estimated  to  average  \\ 


86o  TRUSTS,    POOLS   AND    CORPORATIONS 

marks  per  ton.  Not  all  the  large  steelworks  enjoy  these  advan- 
tages, as  they  have  not  all  been  rationally  located  and  con- 
structed. The  commercial  advantage  of  the  mixed  work  rests 
partly  on  their  commercial  and  financial  preponderance,  and 
partly  on  their  influence  over  prices  and  production. 

The  complaints  of  the  straight  rolling  mills  may  be  concisely 
formulated  as  follows  :  that  the  prices  of  half  products  are  too 
high  in  comparison  with  the  prices  of  light  rolled  products ;  that 
the  steelworks,  although  they  control  the  export,  have  been 
dumping  half  products  ;  that  the  export  of  prices  are  excessively 
low;  and  that  the  export  bounties  are  insufficient  to  enable  the 
straight  rolling  mills  to  compete  with  foreign  mills  using  Ger- 
man half  products.  Regarding  the  price  policy  in  the  domestic 
markets,  extensive  comparisons  might  be  made ;  but  it  is  suffi- 
cient to  cite  that  of  Springmann,  a  leader  of  the  straight  rolling 
mill  group,  who  divides  the  decade  1895  to  1905  into  two  five- 
year  periods,  —  a  period  of  prosperity  and  a  period  of  depres- 
sion. The  margin  between  crude  ingots  and  bar  steel  in  the 
first  period  was  49.75  m.,  and  in  the  second  29.54  m.  He  com- 
pares these  with  the  margins  between  crude  ingots  and  beams, 
which  for  the  same  periods  were,  respectively,  21.15  ni-  3-nd 
26.60  m.,  and  he  claims  that  the  steadiness  of  the  latter  was  due 
to  the  fact  that  the  steelworks  combinations  controlled  the 
prices  of  beams.  A  representative  of  the  steelworks  claimed, 
on  the  other  hand,  that  the  margins  for  beams  were  reasonable, 
as  well  as  the  margin  for  bars  during  the  second  period,  but 
that  the  margins  for  bars  had  been  too  high  in  the  first  period. 
On  a  previous  occasion  Springmann  claimed  that  a  margin  of 
37.50  m.  was  necessary  between  rolled  ingots  (blooms)  and  bar 
steel,  while  A.  Kirdorf  (head  of  the  Half  Products  Syndicate) 
asserted  that  22.50  m.  was  sufficient.  The  truth  here  probably 
lies  near  the  mean.  The  rolling  mills  seem  to  make  a  better 
prima  facie  case  in  the  margins  for  rods.  They  cite  the  cost  of 
rolling  rods  as  given  by  the  Half  Products  Syndicate  as  21  m. 
The  price  of  billets  was  90  m.,  which,  together  with  21  m.  for 
rolling  and  1.50  m.  for  freight,  makes  a  total  of  112.50  m.  The 
prevailing  price  for  rods,  including  domestic  and  export  trade 
and  deducting  bounties,  was  108.21  m.  from  January  to   March, 


THE   GERMAN    STEEL   SYNDICATE  86 1 

1904,  and  107.71  111.  from  April  to  June,  1904.  Tliey^were  com- 
pelled, therefore,  to  sell  at  4.29  m.  and  4.79  m.,  respectively, 
below  a  fair  cost  of  production.  The  representatives  of  the 
straight  roUing  mills  claimed  that  the  steelworks  made  exor- 
bitant profits  on  half  products  ;  but  A.  Kirdorf  denied  it,  and 
offered  to  prove  it  from  the  books  of  his  company.  He  said 
that  there  were  great  differences  in  cost,  and  that  the  steelworks 
that  produced  at  a  disadvantage  had  as  good  a  claim  to  have 
prices  adjusted  to  make  their  business  profitable  as  the  straight 
rolling  mills. 

This  conflict  of  interest  has  not  appeared  in  Silesia,  which  is 
due  partly  to  technical  conditions  and  partly  to  the  organiza- 
tion of  the  industry.  A  sliding  scale  has  been  established 
between  rolled  products  and  pig  iron  which  automatically 
adjusts  the  margin. 

The  Steel  Syndicate  is  incomplete  in  two  important  points  : 
(i)  the  open  hearth  mills  are  not  in  the  combination,  (2)  the  B- 
Products  are  not  syndicated.  The  bar  steel  production  from  the 
open  hearth  furnaces  is  said  to  be  10  per  cent  of  the  total.  The 
Steel  Syndicate  has  made  strenuous  efforts  to  bring  them  in,  but 
without  success.  It  is  said  that  they  demand  exorbitant  quotas. 
It  has  also  been  active  in  trying  to  bring  about  some  modus 
vivendi  for  the  straight  rolling  mills,  which  can  hardly  be 
brought  into  the  syndicate  before  the  open  hearth  furnaces. 
Various  schemes  have  been  proposed.  Under  their  present  dis- 
advantageous position  they  have  a  relatively  depreciated  value. 
If  they  were  admitted  into  the  syndicate  with  reasonable  quotas, 
they  would  unquestionably  be  coveted  by  the  large  mills,  but  it 
is  difficult  to  see  how  the  syndicate  works  could  be  induced  to 
give  away  valuable  privileges  without  a  consideration.  The 
straight  rolling  mills  have  proposed  a  sliding  scale,  but  the  pro- 
posed margins  are  high.  Finally,  the  syndicate  has  made  a 
counter-proposal  that  the  straight  rolling  mills  buy  half  products 
at  ruling  prices,  and  sell  the  rolled  products  to  the  syndicate 
with  a  fair  allowance  for  the  cost  of  rolling.  The  syndicate 
wished  to  get  control  of  the  sale.  The  syndicate  has  made  some 
effort  to  help  bring  about  a  separate  cartell  in  bar  steel,  but  the 
game  of   cartell   politics  is  complicated,  and  there  were  some 


862  TRUSTS,   POOLS   AND   CORPORATIONS 

reasons  for  going  slowly ;  e.g.  securing  first  the  adhesion  of  the 
other  Silesian  mills  and  the  open  hearth  furnaces.  The  straight 
rolling  mills,  according  to  admissions  from  their  own  side,  have 
been  quite  immoderate  in  their  demands.  Accusations  have  not 
been  wanting,  however,  that  the  Syndicate  is  really  aiming  to 
destroy  the  straight  rolling  mills,  and  to  get  control  of  the 
finished  products,  though  this  is  emphatically  denied. 

The  complaints  of  the  straight  rolling  mills  regarding  the 
export  poUcy  of  the  Steel  Syndicate  concerns  a  matter  of  much 
greater  interest  to  German  industry  and  the  world  at  large. 
The  imports  of  steel  are  of  minor  consequence,  although  in  the 
boom  period,  especially  in  1899  and  1900,  there  was  a  consider- 
able importation  of  pig  iron  and  half  products.  The  exports  are 
shown  in  the  following  table: 

EXPORTS   OF  THE   GERMAN   CUSTOMS    UNION  1 

Year  Pig  Iron         Half  Products    Finished  Products 

1898 272  35  1312 

1899 235  23  1244 

»900 191  34  1355 

1901 304  202  1815 

1902 516  636  2127 

1903 418  638  2281 

1904 226  396  2022 

The  domestic  demand  was  so  keen  in  1899  and  1900  that  the 
exports  of  pig  iron  declined.  It  is  remarkable  that  finished 
products  declined  so.  With  the  beginning  of  the  depression  in 
the  domestic  markets  producers  were  led  to  increase  their 
exports.  This  is  especially  marked  for  pig  iron  in  1901  and  for 
half  products  in  1902.  The  exports  of  finished  products  do  not 
show  such  a  decided  increase.  The  straight  rolling  mills  com- 
plained that  the  steelworks  were  dumping  their  production  in 
England,  both  during  the  regime  of  the  Half  Products  Syndi- 
cate and  since  the  Steel  Syndicate  was  formed.  In  answer  to 
this  charge  the  Steel  Syndicate  submitted  the  following  table  for 
domestic  and  export  sales  of  half  products  (finished  weights) : 

Year  Domestic  Per  Cent                   Export  Per  Cent 

1902-03  .  .  .  737,121  tons  50.50  723,016  tons  47-97 

1903-04  .  .  .  844,629  tons  58.26  605,069  tons  41.47 

1904-05  .  .  .  1,018,277  tons  72.12  393,626  tons  27.88 

^  In  thousands  of  tons:  thus  272  =:  272,000  tons. 


THE    GERMAN    STEEL  SYNDICATE  863 

The  sales  in  1904-1905  were  made  during  the  regime  of  the 
Steel  Syndicate.  The  question  of  dumping  applies  only  to  half 
products,  so  far  as  other  branches  of  the  steel  industry  are 
affected,  because  the  other  A-Products  —  namely,  rails  and  beams, 
etc.  ^  are  necessarily  sold  to  the  consumers  in  the  countries 
where  they  are  used.  National  interest,  however,  is  almost 
equally  opposed  to  dumping  these  products.  The  policy  of  the 
Steel  Syndicate  in  the  sale  of  all  A-Products  for  the  first  year 
of  its  activity  (1904- 1 905)  is  shown  in  the  following  statement 
(crude  steel  weights): 

Commodity                                        Domestic  Per  Cent  Export  Per  Cent 

Half  Products 1,154,910             72.20  444,688  27.80 

Railway  Material i,049-454             75-25  345- '69  24.75 

Structural  Iron 1,174,147             76-77  355.288  33.23 

The  Steel  Syndicate  makes  unquestionably  a  favorable  showing. 
It  also  points  out  that,  though  the  export  of  manufactures  of 
half  products  has  declined  somewhat,  the  decline  has  not  been 
so  great  as  the  decline  of  half  products.  It  is  improbable  that 
the  straight  rolling  mills  could  have  so  increased  their  output  as 
to  have  absorbed  all  the  half  products  exported,  if  they  had  been 
given  the  chance.  The  straight  rolling  mills  complain  particu- 
larly of  the  exports  to  England.  Although  the  Steel  Syndicate 
could  show  from  the  official  trade  statistics  there  had  been  a 
heavy  decline  in  this  particular  direction,  it  was  well  known  that 
in  former  years  a  good  deal  of  thC  EngHsh  export  was  reshipped 
to  America,  and  so  a  real  decline  for  the  English  market  was 
not  proven.  The  best  argument  of  the  syndicate  was  that  the 
German  half  products  did  not  constitute  more  than  3.8  per  cent 
of  the  total  English  consumption. 

The  complaints  against  the  export  policy  of  the  steelworks 
were  directed  against  prices  quite  as  much  as  quantities.  Low 
export  prices  have  always  prevailed  in  the  German  iron  and  steel 
trade.  The  reports  of  the  German  steel  companies  frequently 
admit  it.  There  is  no  question  that  the  export  prices  of  half 
products  have  been  very  low,  but  various  circumstances  must 
be  taken  into  account  in  estimating  the  effects.  A  good  deal 
depends  at  what  point  of  delivery  or  sale  the  prices  are  compared, 


864  TRUSTS,   POOLS  AND   CORPORATIONS 

and  how  the  freight  is  reckoned  in  making  comparisons.  The 
rolling  mills  are  apt  to  compare  prices  at  the  producing  mills, 
while  the  steelworks  prefer  to  compare  the  prices  delivered  at 
the  respective  places  of  consumption.-^  Where  export  bounties 
are  allowed,  they  must  of  course  be  counted  in.  In  order  to 
discuss  this  question  satisfactorily,  it  would  be  necessary  to  know 
what  the  export  prices  really  were,  for  what  quantities  they 
applied,  and  what  proportions  of  the  products  made  therefrom 
went  to  different  markets  where  they  really  met  German  com- 
petition. The  theoretical  considerations  are  intricate,  while  the 
information  as  to  the  facts  is  totally  inadequate,  so  that  it  is  im- 
possible to  make  a  very  confident  statement  about  the  real  effects 
of  the  Idw  export  prices.  Lippert,  a  representative  of  the 
straight  rolling  mills,  quoted  export  prices  at  Antwerp,  f.  o.  b., 
at  68  m.  for  ingots,  72  m.  for  billets,  and  72.50  m.  for  sheet  bars 
as  compared  with  domestic  prices  of  82.50  m.,  90  m.,  and  92.50 
m.  respectively.  These  v;ere  emphatically  declared  by  the  repre- 
sentatives to  be  exceptional,  if  made  in  fact ;  and  that  this  was 
before  the  present  syndicate  was  established.  Schaltenbrand, 
one  of  the  directors,  asserted  that  the  export  was  necessary,  and 
they  had  to  take  what  they  could  get.  He  admitted  that  the 
export  prices  were  a  little  lower  than  the  domestic  prices,  but  he 
claimed  that,  if  account  were  taken  of  the  export  bounties  and 
other  conditions,  the  domestic  mills  received  the  more  favorable 
terms.  He  also  quoted  the  real  average  proceeds  from  the  ex- 
port trade  of  the  Steel  Syndicate  for  ingots,  billets,  and  sheet 
bars ;  but  these  figures  were  not  printed  in  the  published  proto- 
col. Complaints  against  the  steelworks  have  also  been  made 
with  respect  to  the  prices  at  which  they  sold  finished  products 

1  Two  calculations  may  be  given  for  illustration,  which  were  offered  at  the  Enquete 
concerning  the  Half  Products  Syndicate.  A.  Kirdorf  gave  the  following  example. 
Export  price  for  rolled  ingots  at  works  to  English  mills,  76  m. ;  freight  to  seacoast, 
3  m. ;  sea  freight,  6  m.;  total  cost,  c.  i.  f.  England,  85  m.  Domestic  price,  delivered, 
84  m.;  export  bounty,  10  m.;  total  cost,  delivered,  74  m.  Kirdorf  figured  for  each 
concern  delivered.  The  German  concern  which  exported  its  finished  product  to 
England  still  had  freight  to  pay.  Springmann  made  his  calculation  as  follows  : 
Export  price  for  billets,  f.  o.  b.  Antwerp,  72  m.;  freight  from  Dortmund  (producing 
works),  5.70  m.;  net  price  at  works,  66  m.  approx.  Domestic  price,  90  m.;  export 
bounty,  10  m.;  net  price  at  works,  80  m.  Springmann  figured  the  price  at  producing 
works.     Enquete,  VI.,  pp.  426,  430. 


THE   GERMAN    STEEL   SYNDICAIE  865 

abroad  in  competition  with  the  domestic  consumcrt'of  their  half 
products. 

Space  does  not  permit  going  into  further  details  in  regard  to 
this  question.  It  has  become  chiefly  of  historical  interest  in 
consequence  of  the  recent  vigorous  /urnsse  in  the  German  steel 
market,  which  has  resulted  in  the  advance  of  prices  all  around 
and  brought  the  export  prices,  according  to  market  reports,  very 
close  to  the  domestic  prices. 

In  order  to  equalize  the  disadvantage  at  which  the  German 
export  industry  has  been  placed  with  respect  to  manufactured 
products  in  consequence  of  the  low  export  prices  of  the  raw 
material  cartells,  export  bounties  have  been  paid  from  time  to 
time  by  the  latter  to  such  of  their  customers  as  were  engaged  in 
the  export  trade.  This  practice  extends  back  to  1891  in  the 
iron  trade,  and  perhaps  earlier.  The  significance  of  the  export 
bounty  system  naturally  became  much  greater  in  the  period  of 
depression  which  followed  the  crisis  of  1900,  and  it  was  consid- 
erably extended.  In  1902  it  was  systematically  organized  by 
the  establishment  of  an  "Export  Accounting  O^ce"  {Abric/i- 
rmngsstellc  fib'  die  AusfuJn-),  in  which  the  coal,  coke,  pig  iron, 
half  products  and  beam  cartells  united  to  pay  export  bounties  to 
each  other,  and  to  the  mills  which  made  and  exported  the  finer 
products.  These  bounties  were  based  on  a  calculation  of  the 
amount  of  raw  material  consumed  in  making  the  finished  product. 
The  general  principles  established  for  the  payment  of  these 
bounties  were,  first,  that  they  were  payable  only  to  members  of 
a  cartell,  and,  second,  that  the  raw  materials  consumed  must  be 
supplied  exclusively  by  the  cartells  paying  the  bounties.  At 
the  beginning  of  1904,  when  the  Steel  Syndicate  commenced 
operations,  the  bounties  were  paid  according  to  the  following 
scale : 

1.50  m.  per  ton  of  coal. 

2.50  m.  per  ton  of  iron  (exclusive  coal  bounty). 
15.00  m.  per  ton  of  half  products  (inclusive  coal  and  iron  bounty). 
20.00  m.  per  ton  of  structural  steel  (inclusive  coal  and  iron  bounty). 

Except  for  a  slight  reduction  of  the  bounty  on  half  products 
for  a  short  time  these  bounties  prevailed  through  1904  and  r905. 
At  the  end  of  1905  the  Steel  Syndicate  decided  to  grant  export 


866  TRUSTS,    POOLS   AND   CORPORATIONS 

bounties  only  to  such  cartells  as  syndicated  the  foreign  as  well 
as  the  domestic  sales,  but  at  the  same  time  they  made  a  very 
important  exception  to  this,  as  well  as  their  previous  rule ;  namely, 
they  consented  to  give  a  bounty  of  7  m.  per  ton  for  half  products 
consumed  by  the  producers  of  steel  bars,  although  there  was  no 
cartell  at  all  in  this  commodity.  This  bounty  was  to  begin  with 
the  second  quarter  of  1906.  The  reason  for  this  exception  was 
that  the  establishment  of  a  cartell  in  bars  was  deemed  practically 
impossible.  If,  as  has  been  frequently  claimed,  there  are  some 
influential  steelworks  in  the  syndicate  who  have  obstructed  the 
formation  of  a  cartell  for  bars,  this  measure  seems  calculated 
to  bring  them  around  somewhat. 

In  the  agreement  constituting  the  Steel  Syndicate  one  of  the 
powers  of  the  Beirat  is  "the  granting  of  authority  to  the  Vor- 
stand  to  conclude  protective  and  other  agreements."  Under 
this  clause  the  syndicate  has  made  agreements  with  foreign  steel 
producers,  which  form  a  cardinal  feature  in  its  policy.  Such 
agreements  are  by  no  means  an  innovation.  An  international 
rail  pool  which  existed  for  a  couple  of  years  was  dissolved  in 
1886.  In  recent  years  there  have  been  numerous  international 
agreements  in  the  steel  trade,  as,  for  example,  rails,  beams,  rods, 
heavy  sheets,  wire  nails,  enamel  ware,  pig  iron,  etc.  These 
various  cartells  include  a  number  of  different  countries,  but  par- 
ticularly Germany's  nearest  neighbors,  France,  Belgium,  and 
Austria.  The  poUcy  of  forming  international  agreements  is  the 
logical  development  of  the  policy  of  forming  local  or  domestic 
agreements,  and  generally  presupposes  the  latter.  In  the  iron 
and  steel  industry  combinations  of  a  more  or  less  comprehensive 
character  exist  in  all  the  important  producing  countries,  and 
there  is  no  doubt  that  the  formation  of  powerful  combinations 
in  one  country  stimulates  its  rivals  to  strengthen  themselves  in 
a  similar  manner.  To  a  certain  extent,  indeed,  the  formation  of 
the  United  States  Steel  Corporation  has  had  an  influence  in 
bringing  about  the  formation  of  the  Steel  Syndicate  in  Germany. 
The  establishment  of  the  Steel  Syndicate  not  only  gave  the 
German  producers  a  greater  power  and  prestige  in  foreign 
markets,  but  it  also  made  it  possible  for  them  to  make  advanta- 
geous agreements  with  their  rivals  for  the  elimination  of  compe- 


THE   GERMAN    STEEL   SYNDICATE  867 

tition.  The  Steel  Syndicate  promptly  availed  itself  of  this 
opportunity. 

A  very  circumstantial  account  of  certain  of  these  transactions 
was  published  in  the  Revue  ^cononiique  intcniationalc  for  De- 
cember, 1904,  signed  by  "  un  industriel  beige."  According  to 
this  authority  a  meeting  was  held  at  Aix-la-Chapelle  in  June, 
1904,  which  resulted  in  the  formation  of  an  international  beam 
pool  between  Germany,  Belgium,  and  France,  with  quotas  of 
73.45  per  cent,  15.05  per  cent,  and  11.05  per  cent,  respectively. 
This  agreement  was  signed  on  November  24,  1904.  It  is  to  ter- 
minate on  June  30,  1907.  Central  selling  offices  were  established 
at  Diisseldorf,  Brussels,  and  Paris.  Negotiations  were  being 
conducted  at  the  same  time  concerning  the  formation  of  an  in- 
ternational rail  pool,  which  appears  to  have  been  consummated 
on  November  28,  1904,  to  take  effect  from  October  11,  1904. 
The  countries  entering  this  pool  and  their  quotas  were  as  follows: 
England,    53^  per   cent;    Germany,   28.83   per  cent;  Belgiurn, 

A  8 
17.67  per  cent;  and  France  (which  came  in  later),  -^ — for  the 

first  year,  ~ —  for  the  second,  and  — '~  for  the  third.      This 
105.8  106.4 

agreement  was  to  terminate  on  March  30,  1908.  The  central 
bureau  was  located  in  London,  besides  local  bureaus  for  each 
national  group.  Since  then  the  chief  American  rail  producers 
have  joined  this  international  pool.  The  Berliner  Tagcblatt 
reported  this  fact  on  December  i,  1904,  the  DcutscJic  Indiistrie- 
Zeitmig  alludes  to  the  fact  in  its  issue  for  January  20,  1905, 
(stating  that  the  pool  had  already  received  numerous  orders),  and 
Kollmann  states  it  also  in  his  account  of  the  Steel  Syndicate, 
giving  the  American  members  of  the  pool  as  the  Steel  Cor- 
poration, the  Lackawanna,  and  the  Pennsylvania. 

Information  regarding  this  agreement  and  the  participation 
of  American  interests  therein  was  not  very  generally  known  out- 
side the  trade  apparently,  so  that  on  July  i,  1905,  the  New  York 
Times  came  out  with  headlines  announcing  that  the  Pairopean 
and  American  producers  had  divided  the  world's  markets,  ac- 
cording to  which  Central  and  South  America  were  to  be  left  to 
the  United  States,  together  with  other  details.     Various  state- 


868  TRUSTS,    POOLS   AND   CORPORATIONS 

ments  have  appeared  concerning  the  terms  of  the  agreement, 
but  none  apparently  which  bear  the  evidence  of  complete  and 
authentic  information.  An  article  in  the  Ncuc  Hamburger Boersai 
Halle  which  seems  to  have  had  some  special  source  of  inspira- 
tion declares  that  the  terms  of  the  agreement,  etc.,  had  been 
kept  secret  at  the  express  wish  of  the  Americans ;  and,  in  this 
connection,  it  may  be  noted  that  the  directors  of  the  Steel  Syn- 
dicate refused  to  discuss  or  divulge  their  agreements  with  foreign 
producers  on  the  ground  that  they  did  not  feel  authorized  to  re- 
veal the  business  secrets  of  their  associates.  Considering  only 
the  aspects  of  this  situation  from  a  German  standpoint,  it  is 
evident  that  such  agreements  are  of  great  significance  to  the 
steel  trade,  and  a  benefit  not  only  to  the  German  steel  trade,  and 
but  also  to  the  whole  national  economy.  For  England,  which 
has  been  the  dumping-ground  of  all  nations,  the  situation  is 
doubtless  more  compUcated  ;  but  for  Germany  it  can  hardly  be 
disputed  that  an  arrangement  that  tended  to  raise  export  prices 
more  nearly  to  a  level  with  domestic  prices  would  be  of  almost 
unalloyed  advantage.  For  the  straight  rolhng  mills  an  interna- 
tional pool  in  half  products  would  be  particularly  beneficial ;  but, 
although  negotiations  in  this  direction  are  reported,  nothing 
seems  to  have  been  accomplished. 

In  passing  judgment  on  the  Steel  Syndicate,  it  must  be  borne 
in  mind  that  it  is  only  a  torso  until  the  light  rolled  products 
(B-Products)  are  included  in  its  sales.  It  is  probable  that  this 
will  be  accomplished  before  long,  and  it  is  probable  also  that  the 
process  of  concentration  will  not  end  at  that  point.  It  is  pos- 
sible that  something  more  comprehensive  than  the  United  States 
Steel  Corporation,  though  not  as  large,  may  be  the  final  result. 
According  to  the  prevailing  German  view  of  industrial  organiza- 
tion, combinations,  like  men,  may  be  "good"  or  "bad,"  accord- 
ing as  they  conduct  themselves.  Up  to  the  present  the  Steel 
Syndicate  should  be  classed,  on  the  whole,  as  a  "  good  "  combi- 
nation; but  it  has  yet  to  endure  a  serious  ordeal,  although  the 
present  Jiausse  may  show  whether  it  possesses  the  most  difificult 
and  most  valuable  of  cartell  virtues,  —  moderation, 

Francis  Walker 

VVashingtu.n,  D.C. 


INDEX 


Addyston  Pipe  Company,  organiza- 
tion of,  78;  purposes  of  agreement, 
82  ;  practical  construction  and  ojiera- 
tion,  84 ;  effects  upon  the  public,  89 ; 
the  Supreme  Court  decision,  533 

Agreements.  See  also  Pools.  Price, 
453;  traders',  under  Sherman  Act, 
551;    international  steel,  862 

American  Agricultural  Chemical  Com- 
pany, and  German  potash  pool,  818 

American  Bridge   Company,   167 

American  Sugar  Refining  Co.,  the 
Knight  case,  506 

American  Tobacco  Co.,  269,  592 

American  Tobacco  Co.,  early  history, 
269;  plug  tobacco  war,  270;  plug 
tobacco  combination,  271;  financiers 
enter,  272;  the  Consolidated  Co., 
277;  internal  revenue  tax  profits, 
278;  merger  in  1904,  281;  general 
policy,  282 ;  present  organization, 
284 ;  capitalization,  286 ;  secret 
controls,  288;  proportional  control, 
296;  foreign  policj^  298;  profits  of 
British  campaign,  308;  results  of 
dissolution,  313;  successor  com- 
panies, 318 

Amoskeag  Corporation,  xviii 

Anti-Trust  Law.     See  Sherman  Act 

Asphalt  Combination,  original  forma- 
tion, 439  ;  later  concerns,  442  ;  im- 
proper promoters  profits,  448. 

Associations.  See  Pools.  Trade,  under 
Sherman  Act,  551 

Atlantic  Seaboard,  steel  competition, 
104 

Auditors,  duties  of,  in  England,  771; 
in  Germany,  781 

Austria,  law  concerning  monopoly,  743 

Baltimore  &  Ohio,  500 

Bathtub  Case,  606 

Beef  Trust  Cases,   550 

Bethlehem   Steel   Companj^,    104,    106, 

414,  436.     See  also  U.  S.  Shipbuilding 

Co. 
Binder  Twine,  650 


Bond   Conversion.      Sec   Chapter   V'll 

U.  S.  Steel  Corporation,  228 
Book  Publishers',  (jcrman  Karlel,  739 
British-American  Toljacco  Co.,  310 
British  Tobacco  Campaign,  298;  com- 
pany law,  760 

Capitalization,  Steel  Corporation,  184, 
198 ;  tobacco  company,  286 ;  Mer- 
cantile Marine  Co.,  369;  U.  S. 
Leather  Co.,  376,  391 ;  basis  of,  in 
Germany,  774 

Carnegie  Steel  Company,  169,  187 

Cartell.     See  Kartel 

Central  Leather  Co.,  389,  397 

Cigar  Combination,  275.     See  Tobacco 

Clayton  .Vet,  715 

Coffee  \'alorizalion,  551 

Combination.  See  Sherman  .\ct.  The 
steel  industry,  97  ;  [wtential  in  steel, 
152;  tobacco  industry,  269;  sole 
leather,  272;  shij)  building,  403; 
asphalt,  439 ;  under  common  law, 
451;  the  Sugar  Refining  Co.,  so(); 
Addystone  Pipe,  78,  533 ;  Watch 
case,  655;  Beef,  673;  explosives, 
673 ;  law  concerning,  in  Germany, 
736  ;  in  Austria,  742  ;  in  France,  747  ; 
German  steel,  833;    German  ix)tash, 

795 
Common  Law,  price  agreements,  453 ; 
trusts,    465 ;     monoiwlistic  corjjora- 
tions,   471;     U.    S.    Supreme    Court 
outline,  475 ;    Standard  Oil  citation, 

Competition,  cutthroat,  113;  potential 
in  steel,  152;   in  harvesters,  347 

Consolidated  Tobacco  Co.,   277 

Conspiracy,  654.  See  Monopoly, 
Sherman  Act,  Unfair  Practices,  etc. 

Copper,   French   corner,   751 

Corner,  551 

Corporation,  holding,  xix;  British 
.\ct,   760;    German,   774 

Corporation.  See  also  Holding  Com- 
pany, at  common  law,  471 ;  new  Eng- 
lish law,  760;   German,  774 


869 


8/0 


INDEX 


Debs  Case,  551 

Depredation,  regulation  of,  in  Germany, 

784 
Dewing,  372,  438,  439 
Director,  under  Clayton  Act,  721 
Discrimination,  local  in  harvesters,  353 ; 

prohibited  in  Clayton  Act,  715 
Dividends,  unearned,  xxiv 
Dumping,  863 

England,  new  companies  act,  760.     See 

also  British 
English  Common  Law.     See  Common 

Law 
Exclusive  Contract,  in  Harvester  case, 

349  . 

Explosives  Combination,  550 

Export  Trade,  in  Steel,  132 ;  British 
tobacco  campaign,  298;  Harvester 
Co.,  343;    German  steel  policy,  862 

Federal   Incorporation,  xxxii.     Federal 

License,  xxxii 
Federal  Steel  Company,   170 
Foreign  Trade,  steel,  132  ;  in  harvesters, 
343,  639;   in  watches,  663;    German 
policy,  862 
France,  law  concerning  monopoly,  747 
Fraud,  prevention  of,  in  England,  773 
Freight  Association,  cases,  572 
Freight  Rates,  and  price  of  salt,  20;  on 
corn  and  whisky,  39 ;  of  nails  before 
combination,    48;      under    wire-nail 
pool,  58,  63,  68;    on  steel,  105,  159 
Freight  Rebates,  112 

Gary  dinners,  178 

German  Steel  Syndicate,  natural  con- 
ditions, 834;  production  by  districts, 
836 ;  early  combinations,  839 ;  first 
Kartell,  841 ;  Stahlverksverband, 
843  ;  structure  and  functions,  845  ; 
price  poHcy,  851;  internal  conflict, 
859;  defects,  861;  export  pohcy,  862  ; 
international  pools,  866;  renewal  in 
1907  and  1912,  832 

Germany,  law  concerning  monopoly, 
736;  promotion  of  companies  and 
valuation  of  assets  in,  774 ;  formation 
of  company  in,  777;  balance  sheets 
of  companies  in,  788  ;  stock  exchange 
law,  791 ;    potash  Kartel,  795 

Good  Will,  335 

Great  Britain.     See  British 

Great  Lakes  Touring  Co.,  672 

Great  Northern  Ore  Lease,  176 


Harlan,  dissenting  opinions,  516,  582, 

598 
Harriman,     497.     See     Union     Pacific 

Holding  Corporations,  xix,  492 

Immunity  Bath,  550 

Imperial  Tobacco  Co.,  304 

Industrial  Combinations.  See  Com- 
bination 

Injunction,  716,  729 

Integration,  in  steel,  158 

Internal  Revenue,  spirits,  23;  and 
tobacco  profits,  278,  316 

International  Harvester  Co.,  promotion, 
324,  634;  proportionate  control,  333, 
647  ;  capitalization  and  investment, 
334 ;  good  will,  335  ;  subsequent  ac- 
quisitions, 336;  foreign  business 
segregated,  339;  profits,  341;  efli- 
ciency  and  resources,  344;  competi- 
tive methods,  347  ;  dissolution  deci- 
sion,   634 ;     dissenting    opinion,    643 

International  Mercantile  Marine  Co., 
356 ;  Fluctuations  in  net  earnings, 
361;  ocean  freight  rates,  365;  pro- 
motion, 368;  faulty  arrangement  of 
the  capital,  369 

International  Salt  Company,  21 

Intimidation,  660.     See  Unfair  Practices 

Joint  Trafiic  Association  Case,  490 

Kartel,  736 

Keystone  Watch  Case,  655 
Knight    Case,    506;     dissenting    opin- 
ion, 516 

Labor,  716;  cases  under  Sherman 
Act,  551.     See  also  Injunctions 

Leather,  combination,  372 

Legislation,  xxx.  See  Sherman  Act, 
England,  Germany 

Michigan  Salt  Association,  i 
Monopoly.     See  also  Combination.     At 

common  law,  561 ;    law  concerning, 

in  Europe,  735 
Montague  vs.  Lowry,  552 

Night  Riders,  551 

Northern  Securities  Decision,  xxii,  491 

North  River  Sugar  Refining  Co.,  466 

Ogden's  (Limited),  300 

Osborne,    636 

Overcapitalization,    of    Steel    Corpora- 


INDEX 


871 


tion,  201 ;  Mercantile  Marine  Co., 
356 ;  discussed,  xxvii.  See  also  Capi- 
talization 

Pacific  Coast,  steel  competition,  no 

Patent  Pools,  xiv ;  604,  606 ;  rights 
of  patentees  defined,  618;  National 
Cash  Register  case,  695 

Pittsburg  District,  competitive  condi- 
tions in  steel,   107 

Pennsyh'ania  Railroad,  499 

Pools.  See  Kartel.  Historical  growth 
of,  xiii.  Michigan  Salt  Association, 
i;  whisky,  26,  27;  wire  nail,  46; 
recent  iron  and  steel,  72 ;  steel  rails, 
72;  billets,  75;  iron  ore,  76;  551; 
patent,  xiv,  552;  judicially  con- 
demned, 604;  under  European  law, 
736 

Potash  Syndicate,  early  agreements, 
798 ;  recent  agreements,  803 ;  re- 
newal, 815;  new  legislation,  821, 
825 ;    American  controversy,  823 

Pottery,  French  combination,  752 

Preferred  Stock,  389 

Prices.  See  Sherman  Act.  Under 
wire-nail  pool,  58;  under  .\ddystone 
Pipe  Co.,  89;  of  steel,  116;  steady- 
ing steel,  126;  cut  prices  in  steel, 
127;  Gary  dinner  agreements,  178; 
tobacco,  313;  under  common  law, 
453;  bathtub  practice,  607,  613; 
under  patents,  611;  competitive, 
only  reasonable,  617;  for  watch 
cases  fixed,  664 

Profits,  salt  manufacture,  16 ;  whisky 
trust,  40;  early  wire  nail,  47  ;  Irregu- 
larity of,  of  Cunard  Company,  361 ; 
U.  S.  Steel  Corporation,  220;  British 
tobacco  campaign,  308 ;  of  Harvester 
Co.,  341 ;  of  promoters  in  Germany, 
782 

Promotion  Profits,  xxiii ;  Steel  Coqjora- 
tion,  203 ;  International  Harvester 
Co.,  324,  634;  International  Mer- 
cantile Marine,  368;  U.  S.  Ship- 
building Co.,  404 ;  asphalt  companies, 
439;  in  Germany,  774;  in  England, 
762 

Prospectus,  issue  of,  in  England,  764; 
of  United  States  Shipbuilding  Com- 
pany, 195 

Prussia,  in  potash  pool,  804 

Pubhcity,  of  prices,  119;  steel  corpora- 
tion policy,  173;  in  Germany,  774; 
in  England,  760 


Railroads,  under  ShcrmTin  .\ct,  48') 

Real  I'^state  Trusts,  xvii 

Reason,  rule  of,  569,  611 ;  rule  applied 
to  prices,  617 

Rebates,  112 

Republic  Iron  &  Steel  Company,  108 

Resale  prices,  608 

Reserve,  treatment  of,  in  (Germany, 
790  _ 

Restraint  of  trade,  at  common  law, 
561 ;   European  law,  735 

Rule  of  Reason,  570;  applied  con- 
cretely, 604 

St.  Louis  Terminal  R.R.  Association 
Case,  495 

Sanborn,  dissenting  opinion,  643 

"Seconds,"  611 

Secrecy,  xxvi,  288.    See  Publicity 

Shelby  Steel  Tube  Company,  1 74 

Sherman  Act.  See  Chapters  XV,  X.V1, 
XVH,  XVIII.  Text,  484;  Con- 
gressional history,  486 ;  uneven  en- 
forcement, 488;  freight  associa- 
tion cases,  489,  572,  586;  Northern 
Securities  decision,  491 ;  St.  Louis 
Terminal  case ;  495 ;  Union  Pacific 
case,  497 ;  anthracite  coal  cases, 
502  ;  New  Haven  dissolution,  503 ; 
Knight  case,  506 ;  .Addystone  Pipe 
case,  533;  Hopkins  case,  546,  573; 
Anderson  case,  548;  later  cases, 
1901-11,  550;  Standard  Oil  deci- 
sion, 552;  the  standard  of  reason, 
569 ;  Steel  Corporation  decision,  97  ; 
Tobacco  Co.  decision,  592 ;  first 
two  sections  construed,  559 ;  the 
English  Common  law  reviewed,  561; 
Supreme  Court  decisions  reviewed, 
572;  rule  of  reason  applied,  604; 
Keystone  Watch  case,  655 ;  Great 
Lakes  Towing  Co.  case,  672 ;  Na- 
tional Cash  Register  case,  672; 
amendments  of  1914,  text,  703 ;  Text, 
Trade  Commission  Law,  704;  Text, 
Clayton  Act,  715 

SnutT  Combination,  274,  293 

Soda,  French  cartell,  749 

Speculation,  ex-il  of  management,  xxv; 
leather  stock,  379 

Standard  Oil  Co.,  Supreme  Court 
decisions,  552;  early  history,  553; 
the  trust  agreement,  555 ;  Ohio  dis- 
solution, 556;  New  Jersey  holding 
corporation,  557;  the  standard  of 
reason,    569,    571;     Supreme    Court 


8/2 


INDEX 


decisions  reviewed,  572;  conclu- 
sion of  facts,  577;  the  remedy,  581 ; 
dissenting  opinion,  582 

Standard  Sanitary  Man'f'g  Co.,  606 

Steel,  proportionate  control  in  191 1, 
99 ;  Atlantic  seaboard  conditions, 
104 ;  Pittsburg  competition,  107 ; 
Pacific  coast  conditions,  no;  de- 
velopment of  processes,  154;  ex- 
pansion and  integration,  158;  trans- 
portation changes,  159 ;  German 
syndicate,  833 

Stock,  Intercorporate  owning,  xxii ; 
ownership  in  tobacco  trust,  287 ; 
exchange  between  railroads,  499; 
intercorporate  forbidden,    720 

Stock  watering,  201.  See  Overcapi- 
talization 

Sugar  Combination,  xvii,  466,  506 

Tariff,  salt,  20 ;  and  nail  pool,  54 

Taussig,  834 

Tennessee  Coal  &  Iron  Company,  176 

Tobacco  Combination,  269 ;  Supreme 
Court  decision,  592 

Tosdal,  H.  R.,  795,  833. 

Trade  Commission  Law,  703 

Trans-^Iissouri  Freight  Association 
Case,  489 

Trusts.  See  also  Industrial  Combina- 
tions, as  de\aces  for  combination, 
xvi ;  in  Massachusetts,  xvii ;  whisky, 
22;  31;  under  common  law,  465; 
Standard  oil,  553 ;  under  common 
law,  465 

Underwriting.  See  also  Promotion  of 
Steel  Corporation,  203 

Unfair  Practices,  xxix ;  rebates,  112; 
cut  prices,  113,  605;  absent  in  har- 
vester case,  653,  65s,  673;  pro- 
hibited by  Clayton  Act,  707 

Union  Pacific-Southern  Pacific  Cases, 
497  ;  dissolution  plans,  498 

United  Asphalt  Co.,  442 

U.  S.  Leather  Co.,  sole  leather  condi- 
tions, 372  ;  tanneries  and  bark  lands, 
374;  capitalization,  376,  391 ;  causes 
of  failure,  379 ;  first  reorganization 
plans,  381,  385;  valuation  of  bark 
lands,  384;  entry  of  the  Armours, 
387  ;  final  reorganization  plan,  389 ; 
timberland  surplus,  392 ;  market 
quotations,  395 ;  litigation,  398 ; 
charter  modified,  400 


U.  S.  Shipbuilding  Co.,  incorporation, 
403  ;  offer  of  promoters,  404 ;  accept- 
ance by  company,  407 ;  purchase  of 
subsidiary  plants,  408;  working 
capital  of,  415 ;  misleading  pro- 
spectus of,  416;  value  of  the  plants, 
418 ;  excessive  price  paid  for  plants, 
422  ;   causes  of  failure,  428 

United  States  Steel  Corporation.  See 
also  Steel  and  Combination,  97 ;  pro- 
portionate control,  99,  222;  no 
rebates,  112;  fair  dealings,  113; 
open  prices,  116;  steady  prices, 
124;  foreign  trade,  132;  U.  S. 
Steel  Products  Co.,  133  ;  diversity  of 
products,  142  ;  original  monopolistic 
intent,  152,  168,  173,  183;  origins, 
169,  203 ;  subsequent  acquisitions, 
174,214;  ore  leases,  176;  Tennessee 
Coal  &  Iron  Co.,  176;  the  Gary 
dinners,  178;  capitalization  and 
assets  1 90 1,  184;  the  Hodge  suit, 
189,  231;  ore  properties,  194,  218, 
226;  overcapitalization,  198;  pro- 
motion and  underwriting,  203  ;  assets 
1910,  216;  profits,  220;  the  bond 
conversion,  228;  valuation  in  bond- 
conversion  suit,  242 

United  States  Steel  Corporation  Bond 
Conversion,  plan  offered  to  stock- 
holders, 228;  injunction  against, 
230;  ground  on  which  injunction 
granted,  233 ;  charge  of  fraud  in, 
236 ;  charge  of  discrimination  in, 
238 ;  valuation  of  assets,  242 ; 
alleged  "strike"  suit,  248;  extent  of 
conversion,  257;  results,  258;  gen- 
eral criticism,  263 

Valorization,  551 

Wages,  influence  of  whisky  trust,  39 ; 
effect  of  wire-nail  pool,  62 

Walker,  Francis,  735,  833. 

Watch  Case  Co.,  655 

Water  Carriers,  550 

Wayman,  606 

Whisky  Trust,  22 

Wire-Nail  Association,  46;  history, 
49;  course  of  prices,  58;  manufac- 
turers' interests,  63;  public  interest, 
67 


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